k|^^^H 

I 

■ 

1 

i-fl 

1 

f 


^ 

u  4., 


19^ 


i^.r  r?' 


Commercial  Law 


A  Practical  Manual  Covering 

THE    FUNDAMENTAL    PRINCIPLES    OF    LAW    AS    APPLIED   TO    BUSINESS    IN 
GENERAL,   WITH    SPECIAL    REFERENCE   TO    COMMON    LAW 
AFFECTING  THE   MORE   USUAL   COMMER- 
CIAL  TRANSACTIONS 


^j/ JOHN   A.  CHAMBERLAIN,  A.  B.,   LL.  B. 

Of  the  Cleveland  Bar 

Lecturer  on  Suretyship,  Western  Reserve  Law  School 

Author  of  "Principles  of  Business  Law" 


AMERICAN    ACCOUNTANTS'  LIBRARY 


AMERICAN  TECHNICAL  SOCIETY 

CHICAGO 

1916 


~^S5-^% 


COPYRIGHT,  1910,  1916,  BT 

AMERICAN  TECHNICAL  SOCIETY 

COPTBIGHTED   IN    OBKAT    BRITAIN 
ALL  BIGHTS  BESEBTBD 


1  111 

INTRODUCTION 


nPHE  purpose  of  the  author  in  writing  this  article  was  to 
furnish  a  book  of  instruction  for  those  unacquainted  with 
legal  principles,  rather  than  to  furnish  a  legal  guide  for  trained 
men.  However,  because  of  the  care  with  which  the  subjects  have 
been  treated,  it  is  hoped  that  the  work  will  be  found  to  appeal  to 
the  latter  as  well  as  the  former  class  of  readers. 
§  The  most  important  subjects  of  the  common  law,  arranged  with 
a  view  of  their  logical  development,  are  discussed.  By  common 
law,  is  meant  the  customs  of  the  people,  recognized  by  the  written 
or  unwritten  decisions  of  the  courts,  as  distinguished  from  legis- 
lative acts,  known  as  statute  or  written  law. 

^  The  author  has  discussed  those  statutes  only  which  are  quite 
universally  recognized.  Students  of  business  administration 
require  a  knowledge  of  the  principles  of  common  law.  They  do  not 
require  a  knowledge  of  the  great  mass  of  statutes,  differing  in  the 
different  States  and  subject  to  frequent  change.  Even  attorneys 
do  not  attempt  to  keep  posted  on  the  statutes  of  different  States, 
but  examine  them  only  as  occasion  requires.  A  few  statutes,  such 
as  the  United  States  Bankruptcy  Act  and  others  of  similar  impor- 
tance, are  discussed. 

John  Aldrich  Chamberlain 
Cleveland,  Ohio 


Table      of      Contents 


Contracts  and  Agency Page   1 

Law  in  General — Contract  Defined  and  Discussed — Oflfer,  Acceptance,  and 
Agreement — Parties — Consideration — Contracts  of  Infants — Novation — Stat- 
ute of  Frauds — Revocation — Illegal  Contracts — Fraud  and  Duress — Mistake — 
Impossible  Contracts — Assignment^ — Warranty  —  Forms  of  Contracts  — Ap- 
pointment of  Agent — Ratification  of  Agent — Duties  and  Liabilities  of  Prin- 
cipal and  Agent — Authority  of  Agents — Factors — Brokers — Auctioneers 

Partnership  and  Corporations Page    65 

Creation  of  Partnership — Classification — Partnership  Agreements — Rights  and 
Liabilities  of  Partners — Powers  and  Property  of  a  Partnership — Survivorship 
— Dissolution — Forms  of  Agreement — Powers  and  Liabilities  of  a  Corporation 
— Creation  of  Corporation — Name — Kinds — Promoters — Reorganization — Con- 
scolidation — Stockholders — Directors — Calls  and  Assessments — Watered  Stock 
— Common  and   Preferred   Stock — Dividends — Officers 

Negotiable  Instruments  and  Banking Page  100 

Negotiability — Law  Merchant — Promissory  Notes — Drafts  and  Bills  of  Ex- 
change— Checks — Certification — Bonds — Collateral  and  Judgment  Notes — 
Rights  and  Liabilities  of  Parties — Indorsement — Forgery  and  Alteration — 
Defences — Consideration — Time  of  Payment — Innocent  Purchaser  for  Value 
without  Notice — Dishonor  and  Protest — Powers  of  Banks — Deposits — Checks 
— Loans    and    Credits — Money — Discount — Exchange — Interest    Usurj' 

Insurance,  Eeal  Estate,  Sales,  and  Loans        ....        Page  146 

Kinds  of  Insurance — Insurance  Contracts — Standard  Policies — Marine  Insur- 
ance— Fidelity  and  Casualty  Insurance — Contract  of  a  Surety,  a  Guarantor,  an 
Indorser — Consideration — Notice — Defence — Subrogation  —  Indemnity — Con- 
tribution— Sale,  Barter,  and  Bailment — Statute  of  Frauds — When  Title 
Passes — Rule  of  Caveat  Emptor — Warranties — Seller's  Lien — Title  to  Prop- 
erty— Warehousemen  and  Storage  Companies — Care  Required — Lien  of  Bailee 
— The  Debt  Secured — Collateral  Securities — Mortgages — Redemption — Fore- 
closure— Estates  and  Land — Title  to  Real  Property — Rights  of  Tenants — 
Rent — Distress — Leases — Transfer  of  Lease — Sub-Letting 

Common  Carriers Page  209 

Liability — Bills  of  Lading — Title  to  Goods  after  Delivery  to  Carrier — Stop- 
page in  Transitu — Delivery — Discrimination — Interstate  Commerce  Act — 
Baggage 

Trade  Marks  and  Trade  Names;  Wills  and  Coltits        .        .        Page  268 

Trade  Marks — Trade  Names — Registration — Unfair  Trade — Wills — Publica- 
tion— Revocation  and  .Alteration — .-Vbatement,  .Advancement,  and  Ademption 
— Courts — Legal  Actions  and  their   Enforcement 

[ndex Page  297 


COMMERCIAL  LAW 

PART  I 


LAW  IN  GENERAL 

1.  Rights.  Men  are  endowed  with  certain  individual  rights. 
These  rights  are  principally  of  two  classes,  personal  and  property.  Men 
have  the  right  to  live  in  peace  and  quietude.  In  so  far  as  it  does  not 
interfere  with  the  same  privilege  on  the  part  of  others  they  have  the 
right  to  be  unmolested  in  the  pursuit  of  happiness.  They  have  the 
right  to  defend  themselves  against  the  attacks  of  others,  to  satisfy 
bodily  hunger  and  thirst,  and  to  preserve  their  bodies  in  health  and 
strength. 

Besides  these  personal  rights,  men  have  the  right  to  acquire  aiid 
keep  property.  This  right  is  also  subject  to  the  limitation  of  not 
interfering  with  the  same  privilege  on  the  part  of  others.  Men  have 
the  right  to  acquire  property,  both  chattel  and  real.  For  the  purpose 
of  rendering  their  existence  and  enjoyment  secure,  they  have  the 
right  to  keep  the  title  and  possession  of  this  property  in  themselves. 

In  primitive  times,  property  rights  were  few.  Personal  rights 
were  recognized  and  enforced  by  might.  As  the  requirements  of 
civilized  life  became  more  complex,  property  rights  were  needed  and 
recognized.  Rules  of  conduct  and  rules  for  the  holding  and  transfer 
of  property  were  recognized  and  enforced.  Might  ceased  to  be  the 
principal  method  of  enforcing  rights.  Rules  began  to  be  recognized 
and  enforced  with  regard  to  persons  and  property.  These  rules  are 
known  as  laws. 

2.  Law.  Law  may  be  defined  to  be  a  rule  of  human  conduct. 
It  may  be  said  to  embrace  all  rules  of  human  conduct  recognized  by 
courts  of  law.  Laws  are  necessary  to  enable  men  to  enforce  and 
enjoy  their  rights,  both  personal  and  property.  Customs  of  men 
become  rules  by  which  human  affairs  are  regulated.  Men  may  dis- 
agree as  to  what  their  rights  are,  or  as  to  their  exact  scope  or  limita- 
tions.     In  this  event,  rules  of  conduct  or  laws  must  determine  their 


2  COMMERCIAL  LAW 

scope  and  limitations.  I)i.sj)uto.s  among  iiicn  .iiisc  aljout  their  per- 
sonal or  property  rights.  The  rules  recognized  by  the  courts  in 
settling  these  disputes  are  laws.  These  rules  or  laws  relate  both  to 
persons  and  property.  A  law  which  prohibits  murder  is  a  rule  by 
which  the  state  protects  the  lives  of  its  citizens;  a  law  which  prohibits 
theft  is  a  rule  for  the  protection  of  property. 

3.  Sources  of  Law.  Law  is  derived  from  the  customs  of  the 
people  and  from  the  written  declarations  or  agreements  of  the  people 
or  their  representatives.  The  customs  of  the  people,  constituting  a 
large  part  of  our  law,  are  found  principally  in  the  decisions  of  courts. 
Each  state  of  this  country  prints  and  keeps  a  permanent  record  of  at 
least  the  most  important  decisions  of  its  court  of  last  resort.  Many 
decisions  of  lower  courts  are  printed  and  preserved.  Every  law 
library  of  importance  has  the  printed  reports  of  the  supreme  court  of 
each  state  of  this  country;  as  well  as  the  reports  of  the  higher  courts  of 
most  of  the  countries  where  the  English  language  is  spoken  or  offici- 
ally recognized.  The  reports  of  the  higher  courts  of  England,  Ireland, 
Canada,  Australia,  and  of  many  of  the  Island  possessions  of  this  coun- 
try and  of  England,  are  found  in  most  law  libraries.  The  second  source 
of  law  is  the  written  declaration  of  the  people  or  their  representatives. 
These  declarations  consist  of  legislative  acts,  treaties  and  constitu- 
tions. In  this  country,  legislative  acts  may  be  either  national 
or  state.  Many  statutes  are  nothing  more  than  recognized  customs 
enacted  into  written  laws.  Other  statutes  are  variations  or 
restrictions  ofrecognized  customs.  National  legislative  acts  are 
numbered  consecutively,  printed  and  bound  into  volumes  known 
as  the  Federal  Statutes.  Each  state  numbers  its  statutes  consecu- 
tively and  prints  and  binds  them  into  volumes  known  as  the  State 
Statutes. 

4.  Divisions  of  the  Law.  There  are  two  great  divisions  of  the 
law,  written  and  unuritten.  The  greater  portion  of  the  law  consists 
of  the  customs  of  the  people,  as  evidenced  and  preserved  by  the  \\Titten 
decisions  of  the  courts.  These  customs,  to  be  recognized  as  law, 
need  not  be  found  in  written  decisions,  but  the  most  important  ones 
have  become  embodied  therein.  New  customs  are  necessary  and  are 
recognized  to  meet  new  and  changing  conditions.  These  new  cus- 
toDQS  are  continually  adding  to  our  unwTitten  law.  ^Miile  this  great 
portion  of  the  law  is  called  unwritten  law,  the  greater  portion  of  it 


COMMERCIAL  LAW  3 

actually  is  in  writing,  and  is  preserved  in  permanent  form  by  our  court 
reports,  both  national  and  state. 

The  second  division  of  law  is  known  as  written  law.  It  consists 
of  treaties,  constitutions,  and  legislative  acts.  Treaties  are  inter- 
national compacts.  Legislative  acts  are  the  laws  passed  by  the  peo- 
ple or  their  representatives.  In  this  country  they  consist  of  the  laws 
passed  by  the  United  States  Congress,  and  by  the  representative 
bodies  of  each  state.  Constitutions,  in  this  country,  consist  of  the 
State  Constitutions  and  the  United  States  Constitudon.  In  Enofland 
the  constitution  is  not  written,  but  is  a  part  of  the  unwritten  law 
of  the  land. 

5.  Classification  of  Law.  A  number  of  useful  classifications 
of  the  law  are  recognized.  Any  classification  is  more  or  less  arbi- 
trary, and  no  classification  has  been  recognized  universally. 

Law  may  be  classified  as  public,  administrative,  and  private. 
Public  law  embraces  the  law  of  nations,  called  international  law; 
the  laws  regulating  the  enforcement  and  recognition  of  constitu- 
tional provisions,  called  constitutional  law;  and  the  laws  protecting 
citizens  against  the  actions  of  dangerous  characters,  called  criminal 
laws. 

The  public  as  a  unit  is  said  to  be  interested  in  pubHc  law.  Public 
laws  are  recognized  and  enforced  in  theory,  at  least,  for  the  benefit 
of  the  public  and  not  for  any  particular  individual.  For  example, 
if  a  murder  is  committed,  the  state  through  its  officers  prosecutes  and 
punishes  the  criminal  on  the  theory  that  a  wrong  has  been  done  the 
state.  The  heirs  or  representatives  of  the  person  murdered  can  sue 
and  recover  money  compensation,  called  damages,  from  the  mur- 
derer, but  the  state  punishes  the  criminal.  This  work  does  not  treat 
of  public  law. 

Administrative  law,  sometimes  called  Law  of  Procedure,  em- 
braces the  rules  and  regulations  relating  to  the  enforcement  of  per- 
sonal and  property  rights.  The  laws  relating  to  courts,  the  method 
and  manner  of  starting  legal  actions,  the  trial  of  cases,  and  the  rend- 
ering and  enforcement  of  judgments  are  common  examples  of 
Administrative  Law.  Private  law  embraces  the  law  of  contracts 
and  of  torts. 

Contracts  consist  of  agreements  of  every  nature.  The  great 
majority  of  deaUngs  of  men  are  carried  out  by  means  of  contracts. 


4  COMMERCIAL  LAW 

This  is  the  most  important,  as  well  as  the  most  extensive  subject 
known  to  the  law. 

Torts  embrace  all  private  wrongs  not  arising  out  of  contracts. 
Any  injury  inflicted  by  one  person  upon  the  person  or  property  of 
another,  which  is  not  a  breach  of  contract,  is  a  tort.  Tort  is  the  French 
word  for  private  wrong.  If  A  carelessly  drives  his  automobile  into 
^'s  wagon ,  he  commits  a  tort.  If  A  carelessly  drives  his  horse  over 
B's  field,  he  commits  a  tort.  If  A,  wrongfully  strikes  B,  he  commits 
a  tort.  Torts  and  crimes  frequently  over-lap.  The  same  act  may 
constitute  a  tort  and  a  crime.  If  A  drives  his  automobile  faster  than 
the  laws  of  the  state  or  city  permit,  and  while  so  doing  runs  over  and 
injures  B,  he  commits  both  a  tort  and  a  crime.  He  is  liable  to  the 
state  for  imprisonment  or  fine  for  the  crime,  and  he  is  liable  to  £  in 
money  for  damages  for  the  tort. 

The  same  act  may  constitute  a  crime,  a  breach  of  contract,  and 
a  tort.  If  A,  engaged  as  a  chauffeur  to  operate  an  automobile  care- 
fully and  skillfully,  violates  the  speed  law,  and  in  so  doing  runs  over 
and  injures  B,  he  commits  a  crime  and  is  liable  to  the  state  for  punish- 
ment or  fine.  He  is  also  liable  in  damages  to  B  for  the  tort  com- 
mitted, and  is  liable  in  damages  to  his  employer  for  breach  of  con- 
tract. This  work  has  largely  to  do  with  the  law  of  contracts  and 
torts. 

The  term  Commercial  Law,  applied  to  this  work,  is  a  term  used 
arbitrarily  to  embrace  the  laws  relating  to  commercial  affairs.  It 
has  no  distinct  place  in  the  general  classification  of  law. 

CONTRACTS 

6.  Contract,  Defined  and  Discussed.  A  contract  has  been 
defined  to  be  an  agreement  between  two  or  more  competent  parties, 
enforceable  in  a  court  of  law,  and  based  upon  a  sufficient  considera- 
tion, to  do  or  not  to  do  a  particular  thing. 

The  law  relating  to  contracts  is  the  most  important,  as  well  as 
the  most  extensive,  branch  of  commercial  law.  It  touches,  directly 
or  indirectly,  most  of  the  dealings  of  men.  It  is  the  legal  basis  of  all 
business  transactions. 

In  the  daily  routine  of  their  life,  most  families  make  many  con- 
tracts. By  reading  the  morning  paper  left  at  his  door,  a  person  im- 
pliedly agrees  to  pay  the  publisher  the  customary  price.     By  ordering 


COMMERCIAL  LAW  5 

the  daily  supply  of  groceries  by  telephone,  the  housewife  impliedly 
contracts  to  pay  for  their  value,  upon  delivery,  or  at  the  customary 
time  of  payment.  By  purchasing  a  number  of  car  tickets  from  the 
street  car  conductor,  a  person  makes  a  contract.  By  ordering  a  lunch, 
a  person  impliedly  agrees  to  pay  the  customary  price.  In  the  more 
important  business  transactions,  formal  contracts  are  written  out  and 
signed.  In  these  transactions  the  parties  endeavor  to  define  their 
duties  and  obligations  clearly  ard  expressly,  in  order  that  they  may 
understand  each  other  and  in  order  that  neither  can  dishonestly 
claim  that  the  contract  contains  a  certain  provision  or  condition. 
Contracts  are  legal  or  illegal,  void  or  voidable,  depending  upon  their 
form  and  nature.  An  understanding  of  the  necessary  elements  of 
valid  contract  is  the  foundation,  to  the  understanding  of  commercial 
law. 

7.  Offer,  Acceptance  and  Agreement.  To  constitute  a  tran- 
saction a  valid  contract,  there  must  be  an  offer  on  the  one  hand,  and 
an  acceptance  on  the  other.  This  necessitates  at  least  two  parties 
to  every  contract.  One  must  make  a  proposition,  the  other  must 
accept  it.  The  acceptance  must  be  of  the  exact  terms  of  the  offer, 
to  constitute  a  legal  acceptance.  If  the  attempted  acceptance  is  not 
made  in  the  precise  terms  of  the  offer,  it  constitutes  a  counter  offer, 
which,  to  constitute  a  contract  must,  in  turn,  be  accepted  by  the 
original  offeror. 

If  A  offers  B  one  hundred  dollars  for  B's  horse,  and  B  in  turn 
agrees  to  take  one  hundred  dollars,  the  transaction  constitutes  a  valid 
contract.  If  A  offers  B  one  hundred  dollars  for  B's  horse,  and  B  in 
turn  offers  to  sell  the  horse  for  one  hundred  and  twenty  dollars,  the 
transaction  does  not  constitute  a  contract,  for  the  reason  that  A's 
offer  has  not  been  accepted.  B,  however,  makes  a  counter  offer, 
which  if  not  assented  to  by  yl,  constitutes  no  contract.  If,  however, 
A  agrees  to  accept  B's  offer  to  sell  the  horse  for  one  hundred  and  twenty 
dollars,  this  constitutes  a  valid  contract,  in  which  B  is  the  offeror  and 
A  the  acceptor.  These  counter  offers  in  response  to  offers  may  go 
on  indefinitely  without  constituting  contracts.  So  long  as  the  response 
to  the  offer  varies  the  terms  of  the  offer,  it  constitutes  a  counter  offer, 
and  not  an  acceptance.  To  constitute  an  acceptance,  the  exact  terms 
of  the  offer  must  be  agreed  to. 

Courts  lay  down  the  principle  that  there  must  be  a  meeting  of 


6  COMMEUCIAL  LAW 

the  minds  of  the  contracting  parties,  to  constitute  the  transaction  a 
valid  contract.  This  means  that  the  offer  must  be  accepted  in  its 
precise  terms.  The  minds  of  the  contracting  parties  cannot  meet, 
unless  the  acceptance  is  of  the  exact  terms  of  the  offer.  This  prin- 
ciple is  sometimes  called  mutuality.  An  acceptance  must  be  com- 
municated to  the  offeror.  A  mere  mental  operation,  or  an  attempted 
acceptance,  not  communicated  to  the  offeror,  does  not  constitute  a 
legal  acceptance. 

The  offer,  or  acceptance,  may  be  in  the  form  of  an  act  as  well 
as  by  verbal  or  written  communication.  If  a  person  orders  a  barrel 
of  flour  of  his  grocer,  the  order  constitutes  the  offer,  and  the  delivery 
of  the  flour  and  the  receipt  of  same  by  the  purchaser,  constitutes  the 
acceptance.  The  purchaser  is  bound  to  pay  the  market  price  for  the 
flour,  regardless  of  the  fact  that  the  price  has  not  been  mentioned. 

An  offer  can  be  recalled  at  any  time  before  acceptance.  To 
recall  an  offer,  the  offeror  must  communicate  his  intention  so  to  do, 
to  the  acceptor  before  acceptance.  Agreements  to  hold  offers  open 
for  a  stipulated  time  are  recognized.  These  options  are,  in  them- 
selves contracts,  and  to  be  binding  must  contain  all  the  essential  ele- 
ments of  a  contract. 

An  offer  which  has  been  accepted  constitutes  an  agreement.  An 
agreement,  as  the  w^ord  suggests,  means  a  meeting  of  the  minds  of 
two  or  more  parties.  The  word  is  frequently  used  as  synonymous 
with  contract,  but  it  is  merely  an  element  of  a  contract.  While  there 
must  be  an  agreement  in  every  contract,  an  agreement  of  itself  does 
not  constitute  a  contract.  There  may  be  an  agreement  between 
persons  under  legal  age,  but  this  agreement  does  not  constitue  a 
contract. 

Besides  an  agreement,  or  meeting  of  the  minds,  a  contract  must 
have  competent  parties,  a  legal  valuable  consideration,  and  a  lav.ful 
object.     These  are  often  called  the  elements  of  a  contract. 

8.  Parties  to  a  Contract.  A  contract  must  have  at  least  two 
competent  parties.  Each  party  to  a  contract  may  consist  of  one  or 
more  persons. 

To  be  competent  to  make  a  contract,  a  party  must  be  of  legal 
age.  Legal  age  is  twenty-one  years  for  males,  and  ordinarily,  eighteen 
for  females.  Legal  age  is  fixed  by  statutes  of  the  different  states. 
These  statutes  differ  somewhat  as  to  the  legal  age  of  females.     Some 


COMMERCIAL  LAW  7 

fix  it  at  twenty-one,  others  at  eighteen,  and  some  even  younger 
than  eighteen,  in  ease  of  marriage.  Intoxicated  persons,  insane 
persons  and  idiots  are  not  competent  to  make  contracts.  Artificial 
persons  or  corporations  can  make  contracts  within  the  scope  of  the 
powers  given  them  by  the  state. 

A  person  who  does  not  voluntarily  consent  to  the  terms  of  a 
contract  is  not  a  party  to  it.  Where  fraud  or  duress  is  used  in  ob- 
taining a  party's  consent  to  a  contract,  the  contract  is  at  least  voidable. 
It  is  not  enforceable  if  the  defrauded  party  objects  on  that  ground. 

9.  Consideration.  Consideration  may  be  good  or  valuable. 
Good  consideration  consists  of  love  and  affection  existing  between 
near  relations.  Good  consideration  is  a  sufficient  consideration  to 
support  a  deed  given  by  one  relative  to  another.  But  this  is  the 
only  kind  of  contract  supported  by  a  good  consideration. 

Valuable  consideration  has  been  defined  to  consist  of  some  right, 
interest,  profit  or  benefit,  accruing  to  the  promisor,  or  some  forbear- 
ance, detriment,  loss  or  responsibility,  given,  suffered  or  undertaken 
by  the  party,  to  whom  the  promise  is  given.  In  short  it  is  a  benefit 
to  the  promisor,  or  a  detriment  to  the  promisee.  All  contracts,  with 
the  exception  of  sealed  instruments,  must  be  supported  by  a  valuable 
consideration.  Sealed  instruments,  except  where  abrogated  by 
statute,  import  a  consideration. 

A  promises  to  sell  his  watch  to  B  for  ten  dollars.  B  accepts  the 
offer  by  offering  to  pay  A  ten  dollars.  There  is  a  valuable  considera- 
tion, consisting  of  B's  promise  to  pay  A  ten  dollars. 

A  promises  B  two  dollars  if  B  will  guard  A's  house  for  two  hours. 
There  may  be  no  actual  benefit  resulting  to  A,  since  it  may  have  been 
unnecessary  to  have  the  house  guarded.  But  if  B  guards  the  house 
for  two  hours,  A  is  legally  bound  to  pay  him  the  contract  price  of 
two  dollars.  The  valuable  consideration  is  the  detriment  or  respon- 
sibility of  B  in  guarding  the  house  for  two  hours. 

Mutual  promises  constitute  a  valuable  consideration.  If  A 
promises  B  two  dollars  if  B  will  work  for  him  next  Thursday,  and  B 
promises  A  to  work  for  him  next  Thursday,  the  contract  is  mutual, 
and  is  supported  by  a  valuable  consideration.  The  consideration 
consists  of  the  promise  on  the  part  of  each  of  the  contracting  parties, 

A  past  consideration  will  not  support  a  contract.  By  a  past 
consideration,  is  meant  a  benefit  received  in  the  past,  for  which  no 
legal  liability  was  incurred  or  exists,     A  gives  B,  his  son,  five  hun- 


8  COMMERCIAL  LAW 

dred  dollars.  One  year  later,  in  consideration  of  the  past  gift,  B 
promises  to  construct  a  dam  for  A.  The  consideration  is  past  and 
does  not  support  the  attempted  contract. 

A  consideration, to  be  valuable  and  sufficient  to  supporta  contract, 
need  not  be  adequate.  A  mutual  promise,  no  matter  how  slight  or 
trivial,  or  the  payment  of  anything  valuable  to  the  promisor,  is  suffi- 
cient. Sometimes  the  inadequacy  of  the  consideration  tends  to  prove 
fraud  it)  the  making  of  the  contract.  When  it  is  sought  to  avoid  a  con- 
tract on  the  ground  of  fraud,  the  inadequacy  of  the  consideration  may 
be  considered  in  connection  with  the  question  of  fraud.  WTien  fraud 
does  not  enter  into  the  question,  adequacy  of  the  consideration  is  not 
questioned. 

A  sells  B  one  hundred  acres  of  land.  The  deed  recites  a  con- 
sideration of  one  dollar.  The  deed  of  transfer  is  good  and  the  small- 
ness  of  the  sum  named  does  not  affect  the  contract. 

A  promise  to  do  something  which  one  is  already  legally  bound 
to  do  does  not  constitute  a  valuable  consideration  to  a  contract.  A 
owes  B  one  hundred  dollars  upon  a  promissory  note.  The  note  is  past 
due  and  A  fails  to  pay  it.  A  promises  to  pay  the  note  within  ten  days, 
on  condition  that  B  promise  to  give  A  a  barrel  of  apples.  B  agrees. 
A  cannot  compel  B  to  deliver  the  barrel  of  apples,  nor  has  A  any  de- 
fense to  the  payment  of  the  promissory  note,  since  his  promise  to  pay 
the  note  was  a  promise  to  do  something  he  was  already  bound  to  do. 

An  illegal  consideration  does  not  support  a  contract.  Any  con- 
sideration contrary  to  established  law  is  illegal.  A  promising  to  pay 
B  one  thousand  dollars  if  B  will  burn  C's  barn  is  an  example  of  illegal 
consideration. 

10.  Express  and  Implied  Contracts.  Some  contracts  expressly 
set  forth  the  exact  terms  and  conditions  to  be  performed  by  both  the 
contracting  parties.  For  example,  A  makes  a  contract  with  B,  by 
the  terms  of  which,  B  is  to  construct  a  house  for  A.  The  contract 
is  carefully  prepared  in  writing,  B  is  to  receive  five  thousand  dollars 
($5,000.00)  when  the  house  is  completed,  and  the  contract  contains 
provisions  as  to  the  details  of  the  work  and  materials.  Such  a  con- 
tract is  called  an  express  contract  by  reason  of  the  terms  having  been 
expressly  agreed  upon  by  the  parties.  A  contract  need  not  be  in 
writing  to  be  express.  The  parties  may  enter  into  an  express  contract 
orally  as  well.     Few  contracts  are  made,  however,  in  which  some 


COMMERCIAL  LAW  9 

things  are  not  implied.  For  example,  in  the  contract  for  the  building 
of  a  house  it  is  practically  impossible,  or  at  least,  is  impracticable,  to 
set  forth  in  exact  detail  all  the  duties  of  the  builder.  For  example, 
it  would  be  unnecessary  to  give  the  size  of  the  nails  and  number  or 
quantity  of  same  to  be  used.  The  contract  impliedly  requires  the 
builders  to  use  the  proper  size  and  quantity.  A  contract,  however, 
in  which  the  parties  endeavor  to  set  forth  the  principal  things  to  be 
done,  is  known  as  an  express  contract. 

An  implied  contract  is  one  in  which  the  parties  do  not  expressly 
agree  upon  some  of  the  important  terms.  A,  a  contractor,  orders  of 
B  one  thousand  feet  (1,000  ft.)  of  No.  1  white  pine  ship  lap  siding. 
The  price  is  not  mentioned.  B  delivers  the  lumber  and  A  by  im- 
plication is  obliged  to  pay  B  the  reasonable  value  thereof.  The 
greater  portion  of  business  contracts  are  implied.  An  implied  con- 
tract should  not  be  confused  with  uncertain  contracts.  Uncertain 
contracts  are  void  by  reason  of  their  uncertainty.  A  offers  B  one 
thousand  dollars  for  five  acres  of  land.  B  accepts  the  offer.  In 
case  the  parties  had  no  particular  five  acres  of  land  in  mind,  the  con- 
tract is  void  by  reason  of  this  uncertainty.  The  parties'  minds  did 
not  meet  on  the  question  of  what  particular  piece  of  land  was  to  be 
transferred.  In  most  implied  contracts  the  article  to  be  delivered  is  a 
part  of  a  large  quantity,  and  the  particular  part  does  not  matter. 
Articles  ordered  from  stock,  such  as  groceries,  shingles,  slate,  cement 
and  lumber  are  common  examples  of  this  principal. 

11.  Unilateral  and  Bilateral,  Executory  and  Executed  Con- 
tracts. The  mutuality  or  meeting  of  the  minds,  constituting  one  of 
the  essential  elements  of  the  contract,  may  result  from  an  express 
promise  for  a  promise,  or  from  an  act  performed  in  response  to  a 
promise.  A  promises  to  sell  his  automobile  to  B  on  the  following 
day  for  five  thousand  dollars  ($5,000.00).  B  promises  to  pay  A  five 
thousand  dollars  ($5,000.00)  the  following  day.  The  mutuality  con- 
sists of  the  mutual  promises  of  A  and  B.  Such  contracts  are  known 
in  law  as  bilateral  contracts. 

A  promises  to  pay  B  one  thousand  dollars  ($1,000.00)  if  B  will 
move  his  house  to  the  rear  of  A's  lot.  B,  without  promising  to  do  so, 
moves  the  house.  This  act  on  the  part  of  B  constitutes  the  accept- 
ance of  the  contract  and  completes  the  mutuality.  Such  contracts 
are  known  in  law  as  unilateral  contracts. 


10  COMMERCIAL  LAW 

A  contract  to  l)c  iKrlonncd  in  the  future  is  known  as  an  exccidxyry 
contract.  A  promises  to  |iay  H  seventy-five  dollars,  if  he  will  work 
on  J'.v  farm  duriiif,'  (he  uionfh  of  Au^'ust  of  the  following  year.  B 
accepts  .Vs  offer  and  promises  to  work  for  A  as  proposed.  The 
contract  is  to  he  performed  at  a  subsequent  date,  and  constitutes 
an  executory  contract. 

An  executed  contract  is  one  which  is  performed.  A  promises 
to  sell  his  bicycle  to  B  for  fifty  dollars  ($50.00);  5  pays  the  fifty  dollars 
(SaO.OO)  to  A  and  receives  the  bicycle.     This  contract  is  executed. 

A  contract  may  be  executed  as  to  one  party  and  executory  as  to 
the  other.  If  A  agrees  to  sell  and  deliver  his  team  of  horses  to  B 
for  five  hundred  dollars  ($500.00)  and  B  pays  A  five  hundred  dollars 
(^.$500.00)  but  A  does  not  deliver  the  team  to  B,  the  contract  is  executed 
as  to  B  and  executory  as  to  ^. 

12.  Contracts  of  Infants.  A  person  nnder  legal  age  is  known 
in  law  as  an  infant.  The  legal  age  is  fixed  by  statute  in  the  different 
states.  In  most  states  this  age  is  twenty-one  for  males  and  eighteen 
for  females.  In  some  states  the  legal  age  for  females  is  under  eighteen 
in  case  of  marriage. 

An  infant's  contracts  are  voidable.  Voidable  does  not  mean 
that  the  contract  is  illegal.  It  is  not  contrary  to  law  for  an  infant  to 
make  contracts.  Me  may  lawfully  make  them.  The  law  will  not 
compel  him  to  carry  them  out.  He  may  carry  them  out  voluntarily 
if  he  chooses. 

A  competent  party,  contracting  with  an  infant  cannot  avoid  the 
contract  on  the  general  ground  of  the  infancy  of  the  other  party  to  the 
contract.  The  infant,  however,  may  avoid  the  contract  by  reason 
thereof. 

An  infant  may  ratify  his  contract  after  becoming  of  legal  age. 
This  ratification  is  effected  by  the  infant's  accepting  benefits  under 
the  contract  after  attaining  his  majority.  Ratification  may  also  be 
etfectetl  by  an  infant  after  he  has  reached  his  majority  by  promising 
to  carry  out  the  contract.  To  have  such  a  promise  amount  to  a 
ratification  the  infant  must  make  the  promise  with  knowledge  that 
he  may  avoid  the  contract  if  he  chooses. 

An  infant  is  liable  on  his  contracts  for  necessaries.  Necessaries 
is  a  variable  term,  depending  upon  the  social  position  of  the  infant. 
Those  articles  essential  to  the  health  and  sometimes  to  the  comfort 


COMMERCIAL  LAW  11 

of  the  infant  are  considered  necessaries.  Food  and  clothing  are  the 
most  common  examples.  A  person  selling  an  infant  necessaries, 
cannot  recover  in  excess  of  their  reasonable  value  regardless  of  the 
contract  price,  and  cannot  recover  at  all,  if  the  infant  is  already  sup- 
plied. Most  courts  hold  that  a  party  selling  necessaries  to  an  infant 
must  determine  at  his  peril  that  the  infant  is  not  supplied.  Articles 
which  would  be  luxuries  for  one  infant,  might  be  necessaries  for  an 
infant  accustomed  to  wealth. 

An  infant  is  not  entitled  to  his  wages  unless  he  has  been  eman- 
cipated. The  father  or  guardian  is  entitled  to  the  wages.  Emanci- 
pation may  be  by  written  declaration  to  that  effect,  on  the  part  of  the 
father.  It  may  also  be  implied  from  the  refusal  or  failure  on  the  part 
of  the  father  to  treat  the  infant  as  his  child. 

13.  Novation  and  Contracts  for  the  Benefit  of  Third  Per= 
sons.  If  A  owes  B  one  hundred  dollars  ($100.00)  and  B  owes 
C  one  hundred  dollars  ($100.00),  the  three  parties  may  agree  that  A 
may  pay  C  one  hundred  dollars  ($100.00),  discharging  the  indebted- 
ness of  both  A  and  B.  This  contract  is  vaild  in  law,  and  is  called 
novation. 

Much  of  our  common  or  unwritten  law  was  taken  from  the 
common  law  of  England.  The  common  law  of  England  did  not 
permit  a  third  party,  for  whose  benefit  a  contract  was  made,  to  enforce 
the  contract.  For  example,  if  A  and  B  enter  into  a  contract  by  which 
A  is  to  pay  C  some  money,  C  cannot  enforce  the  contract.  This  kind 
of  a  contract  is  commonly  known  as  a  contract  for  the  benefit  of  a 
third  person.  With  a  few  exceptions,  the  states  of  this  country  refuse 
to  follow  the  English  doctrine.  The  general  American  doctrine  is 
that  a  third  party  may  enforce  a  contract  made  for  his  benefit.  For 
example.  A,  a  furniture  dealer  was  indebted  to  B  for  a  bill  of  goods; 
C  purchased  A's  business,  and  in  a  formal  written  contract,  as  part 
of  the  consideration,  agreed  to  pay  B  the  amount  of  A's  bill.  After 
the  transfer  of  the  business,  A  became  insolvent  and  B,  learning  of 
the  contract  between  A  and  C,  sued  C  thereon  and  was  permitted  to 
recover.  The  general  American  doctrine  will  not  permit  two  parties, 
making  a  contract  for  the  benefit  of  a  third,  to  rescind  or  avoid  the 
contract  after  the  third  party  has  been  notified  of  it,  and  has  as- 
sented thereto.  Of  course,  two  parties  cannot  bind  a  third  party  to 
perform  any  condition  of  a  contract  without  his  consent.     This  would 


12  COMMERCIAL  LAW 

violate  some  of  the  fundamental  principles  of  contracts.  There  would 
be  no  consent,  no  meeting  of  the  minds,  and  sometimes  no  considera- 
tion. 

14.  Contracts  of  Insane  Persons,  Idiots,  and  Drunkards.  An 
insane  person,  or  one  that  does  not  understand  the  nature  of  the 
contract  in  question,  is  not  bound  by  his  contracts.  He  may  avoid 
them.  Like  an  infant,  he  may  ratify  them  when  he  becomes  sane,  if 
he  chooses.  Statutes  of  all  the  states  provide  for  the  determination 
of  insanity  by  judicial  decree.  Such  a  judicial  determination  is 
presumed  to  give  notice  to  all.  An  idiot's  contracts  are  the  same  as 
an  insane  person's. 

A  drunkard  can  avoid  a  contract  made  while  he  was  intoxi- 
cated, and  if  the  drunkenness  amounts  to  insanity,  it  is  regarded  in 
law  as  such.  Contracts  made  by  a  drunkard  when  not  drunk,  or 
by  a  lunatic  during  a  lucid  interval  are  valid  and  binding, 

15.  Contracts  of  Married  Women.  At  common  law,  upon 
marriage,  the  wife  lost  her  legal  identity  in  her  husband.  Her  estate 
became  his,  her  personal  property  became  his,  and  she  could  not 
thereafter  enter  into  any  legal  obligation.  The  statutes  of  the  states 
generally  at  the  present  time  permit  a  married  woman  to  contract  as 
independently  as  a  man,  relative  to  her  separate  estate.  In  some 
states  there  are  a  few  limitations,  such  as  contracting  directly  with 
her  husband  or  as  surety  for  her  husband. 

16.  Custom  and  Usage  as  Part  of  a  Contract.  Parties  may 
enter  into  any  contracts  they  choose,  so  long  as  the  terms  are  legal.  If 
parties  expressly  agree,  either  orally  or  verbally,  on  the  precise  terms 
of  a  contract,  these  terms  cannot  be  varied  by  usage  or  custom.  Usage 
and  custom  may  be  used,  however,  to  explain  the  intent  of  the 
parties.  Merchants  and  traders  recognize  various  trade  customs, 
without  which  it  would  be  impossible  to  interpret  their  contracts. 
For  example,  A  ordered  five  thousand  barrels  of  cement  of  B,  at 
eighty-five  cents  a  barrel,  to  be  delivered  in  sacks  F.  O.  B.  Mill.  In 
a  suit  for  the  purchase  price,  the  court  permitted  B  to  show  that  there 
was  a  well-known  custom  in  the  cement  trade  to  add  to  the  invoices 
forty  cents  per  barrel  for  sacks,  making  the  invoice  selling  price  of 
the  cement  and  sacks  one  dollar  and  twenty-five  cents  (SL25)  per 
barrel. 

To  constitute  a  part  of  the  contract,  usage  and  custom  must  be 


COMMERCIAL  LAW  13 

of  such  a  general  nature  as  to  be  considered  within  the  contemplation 
of  the  parties. 

17.  Contracts  in  Writing.  Parties  may  make  contracts  ver- 
bally, as  well  as  in  writing.  A  contract  is  not  illegal  because  it  is 
verbal.  It  is  good  business  policy  to  make  important  contracts  in 
writing.  Their  terms  are  easily  proven.  There  is  not  the  tempta- 
tion to  attempt  to  vary  the  terms.  Parties  cannot  claim  they  did 
not  understand  each  other.  It  may  be  laid  down  as  a  general  rule 
that  oral  contracts  are  as  legal  as  written  ones.  By  the  term,  legal 
is  meant  that  the  law  does  not  prohibit  them.  Parties  may  lawfully 
make  oral  contracts,  and  carry  them  out  if  they  choose.  Some  con- 
tracts, however,  are  not  enforceable  at  law  unless  in  writing.  These 
contracts  are  legal.  Parties  may  lawfully  make  them  and  volun- 
tarily carry  them  out,  but  they  cannot  invoke  the  aid  of  the  law  in 
enforcing  their  terms. 

18.  Statute  of  Frauds.  The  class  of  contracts,  required  by  law 
to  be  in  writing  in  order  that  they  be  enforceable,  is  said  to  be 
within  the  Statute  of  Frauds. 

The  Statute  of  Frauds  originated  in  England  in  1677.  It  was 
passed  for  the  purpose  of  preventing  frauds  and  perjuries.  It  re- 
quired that  certain  important  contracts  must  be  made  in  writing,  in 
order  to  be  enforceable  at  law.  The  purpose  of  the  statute  was  to 
remove  the  temptation  of  fraud  and  perjury  in  connection  with  the 
making  and  enforcing  of  certain  contracts.  Two  sections  of  the 
English  statute  apply  especially  to  contracts;  the  fourth  and  the 
seventeenth.     The  fourth  section  is  as  follows: 

"No  action  shall  be  brought  whereby  to  charge  any  executor  or  ad- 
ministrator, upon  any  special  promise  to  answer  damages  out  of  his  own  estate; 
or  whereby  to  charge  the  defendant  upon  any  special  promise,  to  answer  for 
the  debt,  default,  or  miscarriage  of  another  person;  or  to  charge  any  person 
upon  any  agreement  made  upon  consideration  of  marriage;  or  any  contract 
or  sale  of  lands,  tenements  or  hereditaments,  or  any  interest  in  or  concerning 
them;  or  upon  any  agreement  that  is  not  to  be  performed  within  the  space  of 
one  year  from  the  making  thereof;  unless  the  agreement  upon  which  such 
action  shall  be  brought,  or  some  memorandum  or  note  thereof  shall  be  in 
writing  and  signed  by  the  party  to  be  charged  therewith,  or  some  other  person 
thereunto  by  him  lawfully  authorized." 

The  seventeenth  section  of  the  English  Statute  of  Frauds  is  as 
follows : 


14  COMMERCIAL  LAW 

"No  contract  for  the  sale  of  any  goods,  wares,  or  merchandise  for  the 
price  of  ten  pounds  sterling  or  upwards,  shall  be  allowed  to  be  good  except  the 
buyer  shall  accept  part  of  the  goods  so  sold,  and  actually  receive  the  same, 
or  give  something  in  earnest  to  bind  the  bargain,  or  in  part  payment,  or  some 
note  or  memorandum  in  writing  of  the  said  bargain,  be  made  and  signed  by 
the  parties  to  be  charged  by  such  contract  or  their  agents  thereunto  lawfully 
authorized." 

The  English  Statute  of  Frauds  has  been  enacted  in  substance 
in  all  the  states.     Reduced  to  single  propositions  the  statute  provides : 

1.  That  an  executor  or  administrator  shall  not  be  bound  by 
contract  to  pay  damages  out  of  his  own  estate,  unless  the  contract  be 
in  writing. 

For  example,  A  is  executor  of  B's  estate.  C  is  a  creditor  of  B, 
A  orally  promises  C  to  pay  B's  debt.  This  contract  is  not  enforceable 
because  not  in  writing. 

2.  A  party  promising  to  answer  for  the  debt,  default  or  mis- 
carriage of  another,shall  not  be  bound  unless  the  contract  is  in  writing. 

For  example,  if  A  owes  B  $100  and  C  promises  B  to  pay  A's  debt, 
the  contract  is  not  enforceable  if  not  in  writing.  This  clause  of  the 
statute  is  discussed  more  at  length  in  the  chapter  on  suretyship. 

3.  A  contract  made  in  consideration  of  marriage  is  not  en- 
forceable unless  made  in  writing. 

For  example,  A  orally  promised  B  that  if  he  would  marry  her, 
she  would  convey  to  him  her  farm.  B  married  A,  but  could  not  en- 
force the  contract.  A  promise  to  marry  is  not  within  this  section 
of  the  statute. 

4.  Any  contract  or  sale  of  lands  must  be  in  writing  to  be  en- 
forceable. 

For  example,  A  orally  promises  B  to  sell  his  house  and  lot  for 
ten  thousand  dollars  ($10,000.00).  The  contract  is  not  enforceable. 
Most  of  the  states  do  not  require  that  leases  of  less  than  a  year's 
duration  be  in  writing,  to  be  enforceable. 

5.  An  agreement,  not  to  be  performed  within  the  space  of  one 
year,  must  be  in  writing  to  be  enforceable. 

For  example,  A  orally  promises  to  work  for  B  as  sales  agent 
for  three  years.     This  contract  is  not  enforceable. 

6.  No  contract  for  the  sale  of  goods  the  price  of  which  exceeds 
fifty  dollars  ($50.00)  shall  be  enforceable  unless  made  in  writing. 

This  provision  of  the  English  Statute  has  not  been  reenacted  by 


COMMERCIAL  LAW  15 

all  the  states.  About  half  the  states  do  not  require  that  contracts 
for  the  sale  of  personal  property  shall  be  in  writing,  regardless  of  the 
price  involved.  Some  of  the  states  fix  the  price  as  high  as  two  hun- 
dred dollars  ($200.00)  and  others,  as  low  as  thirty  dollars  ($30.00). 

The  details  of  the  entire  contract  need  not  be  in  writing  to 
satisfy  the  provisions  of  the  statute.  A  memorandum  embodying 
the  substance  of  the  agreement,  showing  the  consideration,  and 
signed  by  the  party  to  be  bound,  or  by  his  authorized  agent,  is  sufficient. 

Contracts  called  specialties,  have  to  be  in  writing,  regardless  of 
the  Statute  of  Frauds.  The  most  common  examples  are  bills  and 
notes,  drafts  and  checks.  These  special  contracts  are  made 
to  circulate  as  money,  and  must  be  reduced  to  writing  to 
be  enforceable.  There  can  be  no  such  thing  as  an  oral  check,  or 
draft,  or  promissory  note.  The  oral  contract  for  which  they  are  given 
may  be  enforced,  if  not  within  the  provisions  of  the  Statute  of  Frauds. 

19.  Contracts  by  Correspondence  and  Telegraph.  Parties  need 
not  meet  personally  to  enter  into  contracts.  They  may  legally  make 
them  by  telegraph  or  by  letter. 

It  is  well  settled  by  the  courts  that  a  party  may  make  an  offer 
by  letter,  and  that  in  so  doing  he  impliedly  gives  the  party  addressed, 
the  right  to  accept  by  letter.  In  law,  the  contract  is  complete  the 
moment  the  letter  of  acceptance  is  mailed,  regardless  of  its  ever  being 
received. 

The  offerer  may  stipulate  in  his  offer  by  letter,  that  the  contract 
shall  not  be  made  until  he  is  in  receipt  of  a  reply.  In  this  event,  the 
acceptor's  letter  must  actually  be  received  by  the  offerer,  before  the 
contract  is  complete.  But  if  no  such  stipulation  is  made,  the  con- 
tract is  complete  when  the  letter  of  acceptance  is  mailed. 

If  no  time  for  acceptance  is  stipulated  in  the  offeror's  letter,  the 
acceptor  has  a  reasonable  time  in  which  to  accept.  What  is  a  reason- 
able time,  depends  upon  the  nature  of  the  transaction,  and  the  circum- 
stances surrounding  it.  If  the  offeror  stipulates  in  his  letter  that  the 
offer  must  be  accepted  by  any  stipulated  time,  the  offer,  of  itself,  lapses 
at  the  expiration  of  that  time.  If  A  mails  a  letter  to  B,  offering  to 
sell  one  hundred  bushels  of  wheat  for  one  hundred  dollars  ($100.00), 
and  the  following  day  B  mails  a  letter,  properly  addressed,  postage 
prepaid,  to  A,  accepting  the  offer,  and  the  letter  is  lost,  the  contract 
is  complete  and  B  may  recover  from  A  thereon. 


16  COMMERCIAL  LAW 

If  A,  by  letter  offers  to  sell  B  one  hundred  bushels  of  wheat 
for  one  hundred  dollars  ($100.00),  the  offer  to  remain  open  until 
Thursday,  and  B  mails  his  letter  of  acceptance  Wednesday,  and  the 
letter  is  lost,  the  contract  is  binding  and  A  is  liable  thereon.  If  A 
by  letter  offers  to  sell  B  one  hundred  bushels  of  wheat  for  one  hundred 
dollars  ($100.00),  the  offer  to  be  accepted  upon  receipt^of  B's  reply, 
and  B's  reply  is  lost  in  the  mails,  there  is  no  contract. 

20.  Revocation.  It  is  a  well  recognized  principle  of  contracts 
that  an  offer  may  be  revoked,  or  withdrawn,  at  any  time  before 
acceptance.  In  case  of  revocation  by  mail,  however,  the  letter  of 
revocation  must  be  received  by  the  acceptor,  before  he  has  mailed  his 
letter  of  acceptance.  For  example,  A  mails  B  a  letter  offering  to 
sell  B  one  hundred  bushels  of  wheat  for  one  hundred  dollars  ($100.00). 
B  mails  his  letter  of  acceptance.  By  the  next  mail  B  receives  a 
letter  of  revocation.  The  contract  is  valid  since  the  letter  of  revo- 
cation was  not  received,  until  after  the  letter  of  acceptance  was  mailed. 
The  only  offers  that  cannot  be  withdrawn  at  any  time  before 
acceptance,  are  what  are  known  in  law  as  optiojis.  Options  are  con- 
tracts to  keep  an  offer  open  for  a  stipulated  length  of  time.  They 
require  a  consideration,  an  agreement  and  all  the  elements  of  an 
ordinary  contract.  They  are  contracts.  A  agrees  by  letter  to  sell  B 
one  hundred  bushels  of  wheat,  and  to  keep  the  offer  open  three  days. 
On  the  second  day,  and  before  B  has  mailed  his  acceptance,  B  receives 
a  letter  from  A,  by  which  A  withdraws  his  offer.  B  cannot  now  accept 
A's  offer,  since  there  was  no  consideration  for  A's  promise  to  keep 
the  offer  open  three  days. 

A  writes  B,  offering  to  sell  him  one  hundred  bushels  of  wheat  for 
one  hundred  dollars  ($100.00),  and  to  keep  the  offer  open  for  ten  days. 
B  writes  A  that  he  will  give  him  $2.00  if  he  will  keep  the  offer  open 
ten  days.  A  accepts  the  offer.  On  the  sixth  day  B  receives  a  letter 
from  A  revoking  the  offer  to  sell,  and  on  the  following  day  B  mails 
his  letter  of  acceptance.  There  is  a  valid  contract  in  this  case,  since 
B  had  a  contract  with  A  based  on  a  valuable  consideration  to  keep 
the  offer  open  ten  days. 

Contracts  by  telegraph  are  analogous  in  principle  to  contracts 
by  letter.  An  offer  by  telegraph  impliedly  authorizes  the  receiver 
to  accept  by  telegraph  and  the  offer  is  accepted  when  the  reply  message 
is  deposited  with  the  operator.  If  lost,  or  not  sent,  the  contract  is 
not  affected  in  the  least. 


COMMERCIAL  LAW  17 

21.  Contracts  under  Seal,  Formerly,  at  common  law,  contracts 
under  seal  were  frequent.  At  the  present  time  few  contracts  are  made 
under  seal.  Originally  a  seal  was  an  impression  made  in  wax  placed 
on  a  written  document.  Sealed  instruments  differ  from  other  written 
instruments  in  that  they  import  a  consideration.  At  common  law, 
no  consideration  need  be  proven  to  a  sealed  instrument.  Formerly, 
private  seals  were  in  common  use.  Later,  a  scroll  made  with  the 
pen  or  a  line  or  any  mark  designated  as  a  seal  was  sufficient. 

Private  seals  have  been  abolished  by  statute  in  many  of  the 
states,  so  that  their  use  is  now  limited.  The  modern  tendency  is  not 
to  use  sealed  instruments,  or  when  used,  to  regard  them  as  different 
in  no  respect  from  other  contracts. 

22.  Sunday  Contracts.  All  the  states  of  this  country  have 
statutes  prohibiting  the  transaction  of  business  on  Sunday.  These 
statutes  are  based  on  "the  Lord's  Day  Act"  of  England.  The  English 
statute  provides  that  persons  shall  not  do  or  exercise  any  worldly  labor, 
business  or  work  of  their  ordinary  callings,  upon  the  Lord's  Day,  or 
any  part  thereof,  works  of  necessity  and  charity  only  excepted. 

While  the  statutes  of  the  different  states  differ  in  details,  they 
are  based  upon  the  English  statutes.  Under  the  English  statute,  it 
is  difficult  to  determine  in  many  cases  what  constitute  "works  of 
necessity  and  charity."  The  duties  of  clergymen,  physicians  and 
of  nurses  clearly  are  covered.  It  is  sometimes  stated  that  a  person 
cannot  make  contracts,  within  the  ordinary  scope  of  his  customary 
business,  on  Sunday.  This  is  true,  if  it  does  not  relate  to  charity  or 
necessity.  Deeds,  notes  and  ordinary  contracts,  made  and  delivered 
on  Sunday  are  void.  Subscriptions  for  church  funds  may  legally  be 
made  on  Sunday. 

23.  Illegal  Contracts.  A  contract  prohibited  by  law,  or  made 
for  the  purpose  of  doing  something  prohibited  by  law,  is  illegal,  and 
void.  If  A  promises  B  one  hundred  dollars  ($100.00)  if  B  will  poison 
C's  horse,  the  contract  is  contrary  to  law  and  illegal.  If  B  poisons  C's 
horse,  he  cannot  recover  the  one  hundred  dollars  ($100.00)  from  A. 

Contracts  which  are  against  public  policy  are  illegal  and  void. 
Public  policy  means  the  public  welfare.  INIarriage  brokerage  con- 
tracts and  contracts  in  restraint  of  trade  come  within  this  provision. 
Lobbying  contracts,  contracts  to  influence  votes,  and  for  railroad 
rebates  are  against  public  policy  and  void. 


18  COMIVIERCIAL  LAW 

24.  Wagering  or  Gambling  Contracts.  In  England,  at  com- 
mon law,  wagering  or  gambling  contracts  were  valid.  Gambling  con- 
tracts were  recognized  as  legal  by  some  of  the  states  at  one  time.  At 
the  present  time,  by  statute  the  states  declare  gambling  contracts 
illegal  and  void. 

A  contract  for  the  sale  of  goods,  to  be  delivered  in  the  future, 
even  though  the  seller  does  not  have  possession  of  the  goods  at  the 
time  the  contract  of  sale  is  made,  but  expects  to  purchase  them  from 
a  third  person,  is  not  regarded  as  a  gambling  contract,  and  is  valid. 

Contracts  for  the  purchase  of  stocks  or  goods  in  which  there  is 
no  expectation  to  deliver,  but  simply  an  agreement  to  pay  the  differ- 
ence in  price  at  a  certain  date  according  to  the  state  of  the  market, 
are  gambling  contracts,  and  void. 

25.  Fraud  and  Duress.  Fraud  may  be  said  to  be  misrepre- 
sentation of  a  material  fact,  known  by  the  party  making  the  mis- 
representation to  be  false,  and  made  for  the  purpose  of  influencing 
the  other  party  to  the  contract,  and  acted  upon  by  the  other  party 
to  his  detriment. 

For  example,  A  offers  to  sell  B  a  horse  for  two  hundred  and  fifty 
dollars  ($250.00).  He  tells  B  the  horse  is  sound,  knowing  that  the 
horse  has  a  disease  which  renders  him  worthless.  He  makes  the 
representation  of  soundness  for  the  purpose  of  inducing  B  to  buy. 
B  relies  upon  the  representation,  purchases  the  horse,  and  afterwards 
discovers  the  worthless  condition  of  the  horse.  B  can  return  the 
horse  and  recover  the  purchase  price.  This  is  known  as  rescinding 
a  contract  on  the  ground  of  fraud. 

A  fraudulent  contract  is  not  void,  but  voidable.  The  defrauded 
party  may  avoid  the  contract  if  he  chooses,  but  the  contract  itself,  is 
not  without  efiFect,  simply  by  reason  of  the  fraud. 

A  mere  failure  to  disclose  facts  or  conditions,  if  not  accompanied 
by  active  measures  to  distract  the  defrauded  party's  attention  from 
the  thing  to  be  concealed,  ordinarily  does  not  amount  to  fraud. 

If  one  party  by  means  of  threatened  or  actual  violence  compels 
another  to  enter  into  a  contract,  or  to  part  with  something  of  value, 
the  contract  is  said  to  have  been  obtained  by  duress.  Such  con- 
tracts may  be  avoided  by  the  injured  party,  who  may  recover  what  he 
has  lost. 

A,  a  police  oflBcer,  wrongfully  arrests  and  imprisons  B  and  releases 


COM^IERCIAL  LAW  19 

him  only  after  B  has  signed  a  promissory  nofe  for  one  hundred  dollars 
($100.00).     A  cannot  recover  on  the  note. 

A,  who  is  superior  in  physical  strength  to  B,  by  threats  of  per- 
sonal violence,  compels  B  to  admit  that  he  is  indebted  to  A  for  one 
hundred  dollars  ($100.00),  which  B  pays  A.  B  may  recover  the 
money  from  A.     The  contract  is  voidable  on  account  of  duress, 

26.  Mistake.  One  of  the  essential  elements  of  a  contract  is  that 
there  must  be  a  meeting  of  the  minds  of  the  contracting  parties.  If 
there  is  a  mutual  mistake  on  the  part  of  the  contracting  parties,  their 
minds  do  not  meet  and  no  contract  results.  A  offers  to  sell  B  his 
farm  for  five  thousand  dollars  ($5,000.00).  A  has  two  farms.  A  has 
one  in  mind,  and  B  the  other.  Their  minds  do  not  meet  and  there 
is  no  contract. 

A  mistake  as  to  the  legal  effect  of  a  contract  does  not  avoid  it. 
This  is  known  as  a  mistake  of  law. 

A  mistake  on  the  part  of  one  of  the  parties  only,  ordinarily  does 
not  avoid  the  contract. 

27.  Impossible  Contracts.  Parties  may  enter  into  any  kind 
of  a  contract  they  choose,  so  long  as  the  provisions  and  conditions  are 
legal.  As  a  general  rule,  a  party  is  hable  in  damages  to  the  other 
party,  for  failure  to  observe  and  carry  out  the  terms  of  his  contract. 
There  is,  however,  a  class  of  contracts,  known  in  law  as  impossible 
contracts.  Many  contracts  are  made  upon  the  assumption  that  the 
persons  making  the  contract,  or  the  particular  thing  under  con- 
sideration will  continue  to  exist  until  the  contract  is  performed. 

A  agrees  to  paint  a  picture  for  B,  for  one  thousand  dollars 
($1,000).  A  fails  in  health  or  dies.  A  or  his  estate,  is  not  responsible 
in  damages  to  B,  since  the  contract  contemplated  A's  remaining  in 
health  and  life. 

A  agrees  to  make  B  a  chair  out  of  a  particular  piece  of  walnut 
lumber.  The  lumber  is  destroyed  by  fire  through  no  fault  of  A.  A 
is  not  liable  in  damages,  since  the  parties  contemplated  the  continued 
existence  of  the  lumber.  If,  however,  A  contracts  to  build  B  a  walnut 
chair  within  ten  days  for  fifty  dollars  ($50.00)  and  his  factory  and 
walnut  lumber  are  destroyed  by  fire,  A  is  answerable  to  B  in  damages, 
for  failure  to  deliver  the  chair.  He  has  entered  into  a  lawful  contract, 
and  has  not  excepted  liability  on  account  of  fire. 

A  contract  for  personal  services  is  rendered  of  no  effect  by  the 


20  COMMERCIAL  LAW 

failure  of  health,  or  by  death  of  the  party,  who  is  to  perform  the 
services.  Where,  however,  the  contract  provides  for  the  doing  of  a 
certain  specific  thing,  not  to  be  performed  by  a  certain  person,  and  not 
depending  upon  the  continued  existence  of  a  certain  thing,  the  parties 
are  bound  to  perform,  regardless  of  accident. 

Floods,  earthquakes  or  lightning  do  not  excuse  performance. 
These  accidents  are  known  in  law  as  Acts  oj  God.  (See  Acts  oj  God 
chapter  on  Carriers.)  Acts  of  God  do  not  excuse  performance  unless 
expressly  provided  against  in  the  contract. 

A  law  changed  after  the  contract  is  made,  making  it  unlawful  to 
perform  the  contract,  excuses  performance. 

Strikes  do  not  render  it  impossible  to  perform  contracts,  within 
contemplation  of  the  law.  If  a  party  desires  to  become  exempt  from 
performance  by  reason  of  strikes,  he  must  put  such  a  provision  in 
his  contract. 

If  the  party  to  the  contract,  to  whom  the  performance  is  due, 
renders  performance  impossible  for  the  other  party,  the  latter  is  ex- 
cused on  the  ground  of  impossibility.  For  example,  A  contracts  to 
do  the  wood  finishing  on  B's  house  within  six  months,  B  to  construct 
the  masonry  work.  B  fails  to  construct  the  masonry  work;  this  ex- 
empts A  from  liability. 

28.  Conflict  of  Laws.  The  laws  of  different  states  differ  in 
some  particulars.  Where  this  difference  affects  the  interpretation 
or  enforcement  of  a  contract,  the  doctrine  of  conflict  of  law  applies. 
If  a  contract  is  valid  in  the  state  where  made,  it  is  usually  valid  every- 
where. This  rule  is  subject  to  the  limitation  that  a  state  will  not 
enforce  a  contract  clearly  against  the  policy  of  its  own  laws.  If  a 
contract  is  made  in  one  state,  to  be  performed  in  another,  the  laws 
of  the  latter  apply.  Otherwise,  the  laws  of  the  state  where  the  con- 
tract is  made  apply.  The  laws  relating  merely  to  the  court  procedure 
or  the  method  of  enforcing  a  contract,  belong  to  the  state  called  upon 
to  enforce  the  contract,  and,  even  though  the  laws  of  the  state  where 
the  contract  was  made  differ,  the  former  will  apply. 

The  laws  of  New  York  permit  an  express  company  to  limit  its 
liability  for  loss  of  goods  to  fifty  dollars  ($50.00),  if  so  stipulated  in 
the  bill  of  lading,  in  case  no  valuation  is  fixed  by  the  shipper.  The 
laws  of  Ohio  do  not  permit  an  express  company  to  limit  its  liability 
in  this  way.     A,  in  New  York,  shipped  goods  valued  at  four  hundred 


COMMERCIAL  LAW  21 

dollars  ($400.00)  to  B,  in  Cleveland.  A  placed  no  valuation  on  the 
goods  and  accepted  a  receipt  limiting  the  liability  of  the  express  com- 
pany for  loss  of  the  goods,  to  fifty  d  oUars  (S50 .00) .  The  goods  were  lost. 
B  sued  the  express  company  in  Ohio  for  the  value  of  the  goods.  The 
court  held  that  the  law  of  Ohio  held,  since,  by  the  terms  of  the  contract, 
the  goods  were  to  be  delivered  in  Ohio. 

29.  Assignments  of  Contracts.  By  assignment  of  a  contract, 
is  meant  the  transfer  of  one's  property  rights  in  the  contract.  One 
cannot  assign  his  duties  under  a  contract.  For  example,  A  contracts 
with  B  to  have  the  latter  build  him  a  house,  for  five  thousand  dollars 
($5,000.00).  B  cannot  transfer  to  another,  the  obligation  on  his  part 
to  construct  the  house.  B,  may,  however,  transfer  to  another,  his 
right  to  recover  the  money  for  the  house.  A  may  also  transfer  to 
another,  his  right  to  have  the  house  constructed. 

Contracts  for  personal  service  such  as  the  painting  of  a  picture, 
or  the  writing  of  a  book,  cannot  be  assigned.  In  such  cases  the  per- 
sonal work  of  a  particular  person  is  contracted  for  and  cannot  be 
transferred. 

An  assignment  of  a  contract  is  a  contract  for  the  sale  of  a  property 
benefit  of  a  contract.  The  assignment  must  contain  all  the  elements 
of  a  simple  contract.  The  assignor  of  a  contract  can  transfer  only 
such  property  rights  as  he  possesses.  The  other  party  to  the  con- 
tract retains  any  defense  against  the  assignee,  which  he  had  against 
the  assignor.  A  agrees  to  build  a  house  for  B,  for  five  thousand  dol- 
lars ($5,000.00),  according  to  certain  plans.  A  constructs  the  house 
with  variations,  subjecting  him  to  a  reduction  in  price  of  five  hundred 
dollars  ($500.00).  A  assigns  his  rights  in  the  contract  to  C  and  C 
can  collect  from  B  only  four  thousand  five  hundred  dollars 
($4,500.00).  The  defense  of  B  against  A  is  good  against  A's  as- 
signee, C. 

Upon  assigning  a  contract,  the  assignor  or  assignee  must  notify 
the  other  party  to  the  contract,  of  the  assignment,  else  payment  to 
the  assignor  will  discharge  the  other  party.  For  example,  A  owes  B 
one  hundred  dollars  ($100.00).  B  assigns  the  claim  to  C  C  does 
not  notify  A  of  the  assignment  and  A  pays  B.  B  is  insolvent 
and  C  cannot  recover  from  him.  C  cannot  recover  from  yl,  since  A 
hjis  received  no  notice  of  the  assignment. 

The  following  is  a  recognized  legal  form  of  assignment. 


22  COMMERCIAL  LAW 

For  valuable  consideration,  I 
hereby  assign  all  my  right, 
title  and  interest  in  the 
annexed  (account,  contract,  or 
whatever  the  instrument  may  be), 
to 


Signature  of  assignor. 
Date 


30.  Joint  and  Several  Liability  in  Contracts.  If  A  makes  a 
contract  with  B,  only  two  parties  are  bound  by  the  contract  and  are 
liable  for  its  breach.  If  A  and  B  contract  with  C  and  D,  four  parties 
are  bound  and  are  liable.  A  and  B  may  be  liable  as  one  party  to  C  and 
D,  or  they  may  be  liable  as  two  parties  to  C  and  D.  If  the  contract 
shows  by  its  terms  that  A  and  B  contract  as  a  unit,  and  not  as  separate 
individuals,  their  contract  is  said  to  be  joint.  If  the  terms  of  the 
contract  show  that  A  and  B  intend  to  contract  as  individuals,  as  well 
as  a  unit,  their  contract  is  said  to  be  joint  and  several.  It  the  terms 
of  the  contract  show  that  A  and  B  intend  to  contract  as  individuals 
only,  and  not  as  a  unit,  their  liability  is  said  to  be  several. 

The  importance  of  this  distinction  is  that  in  case  of  a  joint  obli- 
gation, all  the  joint  obligors  must  be  joined  when  sued,  else  the  case 
may  be  dismissed  if  objection  is  made;  while  in  case  of  a  joint  and 
several  obligation,  or  of  a  several  obligation,  individual  obligors  may 
be  sued  separately. 

A  promissory  note  reads,  "We  promise  to  pay"  and  is  signed  by 
A  and  B.  This  is  a  joint  obligation,  and  in  a  suit  thereon  A  and  B 
must  be  joined,  or  the  one  sued  may  have  the  case  dismissed,  by  reason 
thereof.  If,  however,  judgment  is  rendered  against  both,  and  they 
hold  no  joint  property,  the  creditor  may  enforce  his  judgment  against 
either.  This  is  known  in  law  as,  liability  in  solido.  A  promissory 
note  reads,  "We  or  either  of  us  jointly  and  severally  promise  to  pay," 
and  is  signed  by  A  and  B.  A  and  B  are  severally,  as  well  as  jointly 
liable,  and  may  be  sued  separately. 

Where  two  or  more  parties  sign  a  contract,  binding  themselves 
to  do  one  thing  or  a  series  of  things,  the  law  presumes  the  obligation 
to  be  joint.  If  the  language  used  shows  that  the  parties  singly,  or 
individually  bind  themselves  to  do  the  thing,  or  series  of  things  in 


co:m^iercial  law  23 

common,  the  contract  is  several,  as  well  as  joint.  A  owes  B  three  hun- 
dred dollars  ($300.00)  upon  a  promissory  note.  C,  D  and  E  sign 
the  following  guaranty: 

If  A  fails  to  pay  the  note  when  due,  C  individually  promises  to 
pay  B  one  hundred  dollars  ($100.00),  D  individually  promises  to 
pay  5  one  hundred  dollars  ($100.00),  E  individually  promises  to  pay 
B  one  hundred  dollars  ($100.00). 

As  to  each  other  C,  D  and  E,  are  severally  liable.  As  to  B, — C, 
D  and  E  respectively  are  jointly  and  severally  liable,  with  A  for  one 
hundred  dollars  ($100.00)  each. 

31.  Discharge  of  Contract  by  Performance  and  Tender.  A 
contract  is  terminated,  when  the  parties  thereto  perform  its  provisions. 
The  liability  of  parties  ceases  by  performance  of  the  provisions  of 
the  contract.  A  promises  to  construct  a  house  for  B,  according  to 
certain  specifications,  within  a  year.  B  promises  to  pay  A  five  thou- 
sand dollars  ($5,000.00),  upon  completion  of  the  house  according  to 
contract.  A,  within  a  year,  constructs  the  house  according  to  the 
plans  and  specifications.  A's  obligation  is  at  an  end.  B's  obligation 
still  requires  him  to  pay  A  five  thousand  dollars  ($5,000.00),  and  he 
is  liable  to  a  suit  for  this  amount  until  it  is  paid.  ^Mien  B  pays  A 
five  thousand  dollars  ($5,000.00),  his  obligation  and  the  contract  are 
terminated,  as  to  both  parties. 

Tender  of  payment  is  equivalent  in  law  to  pajinent.  By  tender 
is  meant  an  offer  to  pay  in  recognized  legal  money.  A  has  an  option 
for  the  purchase  of  a  house  of  B,  for  five  thousand  dollars  ($5,000.00). 
B  desires  to  have  the  option  lapse,  having  obtained  a  better  offer. 
If  A  offers  B  legal  tender  before  the  option  expires,  the  contract  is 
complete  in  law. 

United  States  statutes  stipulate  what  constitute  legal  tender. 
These  statutes  provide  that  the  following  shall  constitute  legal  tender: 

1.  Gold  coin. 

2.  Silver  dollars. 

3.  Subsidary  silver  coin  up  to  ten  dollars. 

4.  Nickels  and  pennies  not  exceeding  twenty-five  cents. 

5.  United  States  notes,  except  for  duties  on  imports,  and  in- 
terest on  public  debts. 

Silver  certificates,  bank  notes  and  private  checks  are  not  legal 
tender. 


24  COMMERCIAL  LAW 

32.  Discharge  of  Contract  by  Subsequent  Agreement.  Con- 
tracts may  be  terminated  by  another  contract,  made  after  the  contract 
in  question  has  been  entered  into.  For  example,  A  promises  to  con- 
struct, within  one  year,  a  house  according  to  certain  plans,  for  B.  B 
promises  to  pay  A  five  thousand  dollars  ($5,000.00),  upon  completion 
of  the  house.  A  completes  the  excavation  of  the  cellar  and  B  fails 
in  business,  and  desires  not  to  have  the  house  constructed.  He 
offers  A  five  hundred  dollars  ($500.00),  for  the  work  already  done, 
and  to  release  him  from  his  obligation.  A  accepts  B's  proposition. 
The  original  contract  has  been  terminated  by  the  subsequent  one. 

33.  Warranty  and  Remedies  for  Breach  of  Warranty.  A 
warranty  is  a  contract  collateral  to  the  principal  contract,  by  which 
a  party  to  a  contract  specifically  covenants  certain  things.  War- 
ranties apply  especially  to  sales  of  personal  property.  (See  warranty 
under  Sales  of  Personal  Property.)  A  promises  to  build  a  house  for  B 
and  warrants  the  paint  to  stand  untarnished  and  uncracked  for  one 
year.     The  covenant  on  A's  part  relating  to  the  paint  is  a  warranty. 

Breach  of  warranty  ordinarily  does  not  entitle  the  other  party 
to  rescind  the  contract.  That  is,  it  does  not  permit  him  to  refuse  to 
carry  out  his  part  of  the  contract,  but  entitles  him  to  bring  an  action 
for  damages,  for  its  breach. 

34.  Recission  and  Discharge  of  Contracts  by  Breach.  If  a 
party  fails  or  refuses  to  carry  out  a  provision  of  a  contract,  he  is  said 
to  have  committed  a  breach  of  contract.  When  one  party  to  a  con- 
tract commits  a  breach,  the  other  party  may  accept  the  breach  and 
sue  for  damages,  or  he  may  refuse  to  accept  the  breach  and  wait 
until  the  time  for  complete  performance  arrives,  and  then,  if  the  other 
party  has  not  performed,  sue  for  damages. 

When  a  party  to  a  contract  commits  a  breach,  and  notifies 
the  other  party  of  his  refusal  further  to  carry  out  the  contract,  the 
other  party  cannot  increase  the  defaulting  party's  damages  by  con- 
tinuing performance  thereafter.  For  example,  A  contracts  with 
B  to  have  a  fence  finished  and  erected  around  A's  house.  After  B 
has  half  of  the  fence  manufactured  and  erected,  A  refuses  to  go  on 
with  the  contract.  B  cannot  increase  the  damages  by  naanufacturing 
and  erecting  the  balance  of  the  fence.  The  reason  for  this  is  that  it 
would  not  benefit  B  at  all,  but  would  merely  injure  A.  B  is  entitled 
to  recover  his  profit  for  the  entire  job,  when  A  breaks  the  contract. 


COMMERCIAL  LAW  25 

He  could  recover  no  more  by  manufacturing  and  erecting  the  balance 
of  the  fence. 

The  law  does  not  recognize  trivial  things.  A  party  cannot  claim 
breach  of  contract  for  failure  of  the  opposite  party  to  a  contract,  to 
perform  an  unimportant  thing.  The  law  recognizes  substantial  per- 
formance as  actual  performance.  This  does  not  mean  that  a  party 
cannot  put  such  terms  in  a  contract  as  he  chooses,  but  means  that,  in 
the  absence  of  any  provisions  of  the  contract  to  the  contrary,  a  party 
is  not  presumed  by  law  to  contract  for  trivial  things.  Time  of  perform- 
ance is  an  illustration  of  this  principle.  A  contracts*  with  B  for  the 
building  of  a  house.  B  promises  to  complete  it  in  one  year.  If  com- 
pleted in  one  year  and  a  day,  there  is  a  substantial  performance,  un- 
less the  contract  expressly  shows  that  the  precise  day  of  performance 
was  regarded  as  important. 

Where  contracts  provide  for  separate  performances,  a  failure 
or  refusal  to  fulfil  one  performance  will  not  always  amount  to  a 
refusal  or  failure  to  perform  the  balance.  A  agrees  to  ship  B  five 
ihousand  barrels  of  cement,  in  car  load  lots  of  one  hundred  and  fifty 
barrels  each  to  be  shipped  each  week.  B  receives  and  refuses  to  pay 
for  the  first  car.  This  may  not  amount  to  a  breach  of  the  entire  con- 
tract, so  as  to  justify  A  in  refusing  to  ship  the  balance.  The  tendency 
of  American  courts,  however,  is  to  treat  this  as  as  one  contract;  that 
is  to  treat  the  promises  as  dependent,  and  not  independent. 

The  acceptance  by  one  party,  of  a  breach  of  contract  made  by 
the  other,  and  the  refusal  on  the  part  of  the  former  further  to  carry 
out  the  contract,  is  known  in  law  as  recission.  To  rescind  a  contract, 
a  party  must  return  what  he  has  received  thereunder,  called  putting 
the  other  party  in  statu  quo.  He  must  also  accept  the  breach  promptly. 
For  example,  A  promises  to  sell  B  three  horses  to  be  delivered  one 
each  day,  upon  the  three  following  days.  A  delivers  one  and  fails 
to  deliver  the  second.  To  rescind  the  contract,  B  must  return 
promptly  to  A  the  horse  already  delivered.  He  may  then  sue  A  for 
damages  suffered.  If  B  does  not  promptly  return  the  horse  to  A, 
he  must  permit  A  to  go  on  with  the  contract,  waiving  the  delay,  or 
pay  for  the  horse  already  delivered,  less  damages  for  A's  breach  of 
contract. 

35.  Discharge  by  Bankruptcy.  By  a  United  States'  statute, 
certain  persons  may  become  bankrupts  and  thereby  be  discharged 


26  COMMERCIAL  LAW 

from  their  obligations.  By  the  terms  of  this  act,  the  bankrupt's 
property  is  turned  over  to  an  officer,  called  a  trustee  in  bankruptcy 
who  disposes  of  it,  and  distributes  it  -pro  rata  among  the  bankrupt's 
creditors.  Any  person  except  a  corporation,  who  owes  debts,  may 
become  a  voluntary  bankrupt. 

The  United  States  statute  further  provides  that  certain  persons 
may  be  declared  bankrupts  at  the  instance  of  their  creditors.  The 
United  States  statute  provides  that: 

"Any  natural  person,  except  a  wage  earner,  or  a  person  engaged  chiefly 
in  farming  or  the  tillage  of  the  soil,  any  unincorporated  company  and  any 
corporation  engaged  principally  in  manufacturing,  trading,  printing,  pubhsh- 
ing,  mining  or  mercantile  pursuits,  owing  debts  to  the  amount  of  one  thousand 
dollars  ($1,000.00)  or  over,  may  be  adjudged  an  involuntary  bankrupt,  upon 
default,  or  on  impartial  trial  and  shall  be  subject  to  the  provisions  and  en- 
titled to  the  benefits  of  this  act.  Private  bankers,  but  not  national  banks 
or  banks  incorporated  under  state  or  territorial  laws  may  be  adjudged  involun- 
tary bankrupts." 

Any  of  the  above  enumerated  parties  may  be  made  an  involun- 
tary bankrupt  at  the  instance  of  creditors  if  he  has  committed  an 
act  of  bankruptcy. 

The  bankruptcy  statute  defines  an  act  of  bankruptcy  as  follows : 

"Acts  of  bankruptcy  by  a  person  shall  consist  of  his  having  (1)  conveyed, 
transferred  concealed  or  removed,  or  permitted  to  be  concealed  or  removed, 
any  part  of  his  property  with  intent  to  hinder,  delay  or  defraud  his  creditors 
or  any  of  them;  (2)  transferred,  while  insolvent  any  portion  of  his  property 
to  one  or  more  of  his  creditors  with  intent  to  prefer  such  creditors  over  his 
other  creditors;  or  (3)  suffered  or  permitted,  while  insolvent,  any  creditor  to 
obtain  a  preference  through  legal  proceedings  and  not  having  at  least  five 
days  before  a  sale  or  final  disposition  of  any  property  affected  by  such  preference 
vacated  or  discharged  such  preference;  or  (4)  made  a  general  assignment  for 
the  benefit  of  his  creditors,  or  being  insolvent,  applied  for  a  receiver  or  trustee 
for  his  property,  or  because  of  insolvency  a  receiver  or  trustee  has  been  put 
in  charge  of  his  property  under  the  laws  of  a  state,  of  a  territory,  or  of  the  United 
States;  or  (5)  admitted  in  writing  his  inabiUty  to  pay  his  debts,  and  his  wilHng- 
ness  to  be  adjudged  a  bankrupt  on  that  ground." 

Bankruptcy  discharges  a  bankrupt  from  his  contracts. 

36.  Remedies  for  Breach  of  Contract.  Originally,  at  common 
law,  there  was  no  power  given  a  party  to  a  contract,  to  compel  the 
other  party  specifically  to  perform  the  provisions  of  the  contract. 
For  example,  A  promises  to  pay  B  one  thousand  dollars  (SI, 000.00) 
for  one  thousand  bushels  of  wheat,  to  be  delivered  within  ten  days. 
B  fails  and  refuses  to  deliver  the  wheat.     A  could  not  at  common  law. 


COMMERCIAL  LAW  27 

and  cannot  under  the  present  rules  of  law,compel  B  to  deliver  the  wheat. 
A's  remedy  is  an  action  for  damages.  A  may  go  into  the  market  at  the 
time  and  place  of  delivery,  provided  for  in  the  contract,  and  purchase 
one  thousand  bushels  of  wheat  of  the  quality  provided  for  in  the 
contract,  and  collect  as  damages  from  B  the  advance  in  price,  if  any, 
together  with  expenses  connected  therewith.  If  A  is  obliged  to  pay 
one  thousand  five  hundred  dollars  ($1,500.00)  for  the  wheat,  which 
by  the  terms  of  the  contract,  he  had  purchased  for  one  thousand 
dollars  (SI, 000.00)  from  B,  he  may  recover  five  hundred  dollars 
(S500.00)  damages  from  B.  If  A  succeeds  in  obtaining  the  w^heat 
for  nine  hundred  dollars  ($900.00),  he  can  only  recover  nominal 
damages  from  B,  commonly  five  cents,  for  breach  of  contract.  In 
case  A  obtains  the  wheat  for  nine  hundred  dollars  ($900.00),  B  cannot 
recover  one  hundred  dollars  ($100.00)  from  A,  since  he  has  violated 
the  contract,  and  cannot  take  advantage  of  his  ovm  WTong. 

Parties  frequently  fix  the  amount  of  damages  for  a  possible 
breach  at  the  time  the  contract  is  made.  This  is  known  in  law  as 
liquidated,  damages.  If  reasonably  compensatory,  the  courts  will 
recognize  and  enforce  liquidated  damages;  if  clearly  unreasonable 
they  are  regarded  as  penal,  and  the  courts  will  not  enforce  them. 
For  example,  A  agrees  to  construct  a  rolling  mill  for  B,  for  fifty 
thousand  dollars  ($50,000.00),  and  to  complete  the  structure  within 
one  year,  and  to  pay  damages  of  two  hundred  dollars  ($200.00)  per 
day,  for  each  and  every  day  consumed,  in  excess  of  a  year  in  finishing 
the  structure.  If  this  is  a  reasonable  loss  to  B,  for  the  failure  to  have 
the  use  of  the  mill,  the  courts  will  enforce  the  provisions;  otherwise 
they  will  remit  the  excess  over  the  fair  value  of  B's  loss. 

37.  Equity  and  Specific  Performance.  Originally,  at  common 
law  in  England,  the  king  and  his  subordinates  heard  suits.  Certain 
specified  actions  or  remedies,  only,  were  allowed.  It  was  soon  ob- 
served that  many  complaints  were  made,  and  disputes  arose,  which 
did  not  come  within  the  scope  of  these  common  law  actions.  The 
king  appointed  a  chancellor  to  assist  him.  It  was  the  duty  of  the 
chancellor  to  hear  disputes,  not  within  the  scope  of  the  recognized 
common  law  action,  and  to  determine  and  decide  these  upon  equit- 
able principles.  This  court  became  known  as  the  court  of  chancery, 
or  court  of  equity.  A  regular  system  of  courts  of  chancery  grew  up 
in  England,  with  fixed  rules  of  procedure  and  of  recovery.     This 


28  COMMERCIAL  LAW 

country  has  Courts  of  Equity.  In  many  states,  the  same  ju(]ge  sits 
as  a  court  of  law,  and  of  equity.  Equity  does  not  hear  cases  where 
there  is  a  complete  and  adequate  remedy  at  law.  Equity  courts 
have  a  judge  only,  and  no  jury.  Courts  of  equity  sometimes  spe- 
cifically enforce  contracts  in  case  there  is  no  adequate  remedy  at  law. 
For  example,  A  purchases  a  lot  of  £  in  a  particularly  desirable  locality. 
There  is  no  other  vacant  lot  near  it.  In  case  B,  refuses  to  carry  out  his 
contract,  by  conveying  this  lot  to  A,  equity  will  compel  B  to  convey 
the  lot  to  A.  Here  A  has  no  adequate  remedy  at  law.  Money 
damages  will  not  enable  him  to  procure  what  he  contracted  for. 

Specific  performance  is  rarely  granted  in  case  of  sales  of  personal 
or  chattel  property.  There  are  a  few  exceptions.  If  A  purchases 
"Maud  S."  from  B  for  ten  thousand  dollars  ($10,000.00),  "Maud  S." 
being  a  two  minute  race  horse,  purchased  for  breeding  purposes, 
and  B  refuses  to  deliver  her,  a  court  of  equity  might  grant  specific 
performance.  Money  damages  might  not  enable  A  to  purchase  a 
similar  horse.  The  same  principle  applies  in  case  of  purchases  of 
rare  works  of  art. 

While  a  contract  for  personal  services  cannot  be  specifically 
enforced  by  a  court  of  equity, some  relief  may  be  granted  by  injunction. 
For  example.  A,  an  actress,  agrees  to  perform  for  one  year  for  B  and 
later  refuses.  While  a  court  manifestly  cannot  compel  A  to  perform 
for  B,  it  will  by  injunction  prevent  her  performing  for  others. 

38.  Forms  of  Contracts.  The  following  is  a  form  of  simple 
contract. 

Chicago,  111.,  June  23,  1909. 

Contract  entered  into  this  ....  day  of   1909,  by  and 

between  A,  the  first  party,  and  B,  the  second  party. 

In  consideration  of  the  promises  hereinafter  made  by  the  second 
party,  the  first  party  agrees (here  state  first  party  agree- 
ment). 

In  consideration  of  the  promises  of  the  first  party,  the  second 

party  agrees (here  state  agreement  of  second  party). 

Signed First  Party. 

Signed Second  Party. 

The  following  is  a  form  of  a  formal  contract. 

Articles  of  agreement  entered  into  in  New  York  City  this 

day  of  ....  190-  by  and  between  A,  hereinafter  designated  as  the 
first  party,  and  B,  hereinafter  designated  as  the  second  party. 

Whereas,  the  first  party  is  a  wholesale  dry  goods  merchant  having 


COMMERCIAL  LAW  29 

a  place  of  business  in  New  York  City,  and  is  desirous  of  employing  a 
traveling  salesman,  and  whereas,  the  second  party  is  a  travelirig 
salesman  having  had  ten  years'  experience  in  the  dry  goods  business, 
now,  therefore  in  consideration  of  the  promises  hereinafter  made  by 
the  second  party  the  first  party  agrees. 

First.    To  pay  the  second  party  the  sura  of  $2400  in  installments 
of  $200  payable  each  month  for  a  period  of  12  months. 
Second.  To  pay  the  second  party's  traveling  expenses  not  to  exceed 
$50.00  per  week,  to  be  mailed  weekly  as  ordered  by  second 
party. 
Third.  To  furnish  second  party  a  full  line  of  samples. 
In  consideration  of  the  promises  of  the  first  party  the  second 
party  agrees, 

First.    To  devote  his  entire  time  and  attention  to  the.  business 

of  selling  goods  of  the  first  party. 
Second.To  furnish  lists  of  customers  called  upon  each  day,  said 
lists  to  be  mailed  to  said  first  party.  New  York  address, 
each  evening. 
Third.  To  waive  his  right  to  any  salary  in  excess  of  his  traveling 

expenses  if  his  sales  do  not  average  $5000  per  week. 
In  witness  whereof  the  parties  have  affixed  their  names  and  seals 
in  duplicate  theday  and  year  above  written. 

First  Party. 

Second  Party. 

PRINCIPAL  AND  AGENT 

39.  In  General.  Agency  is  the  term  applied  to  the  legal  relation 
existing  between  persons  who  transact  business  or  perform  duties 
through  representatives.  Few  duties  are  performed,  and  few  busi- 
ness transactions  are  completed  solely  through  the  personal  efforts 
of  the  interested  parties.  Most  business  dealings  are  completed  in 
part,  at  least,  by  representatives  or  agents.  ]\Iuch  important  busi- 
ness is  transacted  by  corporations.  Corporations  must  act  through 
agents.  They  have  no  identity  apart  from  officers  and  agents.  In- 
dividuals, as  well  as  the  smaller  business  concerns,  perform  many 
of  their  duties  and  make  many  of  their  contracts  through  representa- 
tives or  agents.  The  law  relating  to  agency,  next  to  the  law  of  con- 
tracts is  probably  the  broadest  as  well  as  the  most  important  branch 
of  commercial  law.  Its  application  is  almost  universal.  A  distinc- 
tion is  sometimes  drawn  between  representatives  appointed  to  make 
contracts  with  third  persons,  and  representatives  appointed  to  per- 
form menial  or  mechanical  work,  by  calling  the  one  class,  agents,  and 
the  other  servants.  There  is  little  reason  for  any  such  distinction. 
The  same  rules  of  law  apply  to  both  agents  and  servants.     The  prin- 


30  COIMMERCIAL  LAW 

cipal  distinction  is  in  the  nature  of  the  service,  which  need  not  be  con- 
sidered in  discussing  the  general  legal  principles. 

The  party  appointing  another  to  represent  him  in  his  relation 
to  third  persons  is  called  the  principal.  The  person  appointed  to  act 
as  a  representative  is  called  the  agent.  The  legal  relationship  ex- 
isting between  the  principal  and  the  agent,  and  the  principal,  agent 
and  third  person,  constitutes  the  law  of  agency.  If  a  dry  goods  mer- 
chant, A,  employs  B,  a  traveling  salesman,  to  sell  his  goods,  and  B 
sells  goods  to  C,  A  is  the  principal,  B  the  agent,  and  C,  the  third 
person  contracting  with  A,  through  A's  agent  B. 

40.  Who  May  be  a  Principal.  A  principal  is  one  who  ap- 
points an  agent.  A,  employs  B  to  deliver  goods;  A  is  principal  and 
B  agent.  Any  person,  natural  or  otherwise,  competent  to  enter  into 
a  contract,  may  enter  into  a  contract  through  an  agent.  There  is  one 
possible  exception  to  this  rule.  It  is  a  well  recognized  rule  of  law  that 
an  infant  cannot  appoint  an  agent.  An  infant  may  enter  into  a  con- 
tract which  is  not  void  at  law,  but  which  is  merely  voidable.  (See 
subject,  "Infant"  in  Chapter  on  Contracts.)  That  is,  an  infant  may 
lawfully  make  and  carry  out  a  contract.  The  law  does  not  prohibit 
it.  But  the  law  will  not  compel  an  infant  to  carry  out  his  contracts, 
except  for  necessaries.  WTien  it  comes  to  the  appointment  of  an 
agent,  however,  the  law  refuses  to  give  an  infant  this  power.  By  an 
infant  is  meant  a  person  under  legal  age. 

Any  person  of  legal  capacity  may  appoint  an  agent.  In  other 
words,  a  person  may  do  through  an  agent  the  things  he,  himself,  may 
do.  An  insane  person,  an  idiot  or  a  dnmken  person  cannot  appoint 
an  agent.  A  corporation  may  do  business  through  agents,  limited 
only  by  its  corporate  capacity.  A  partnership  may  do  business 
through  agents,  limited  only  by  the  purposes  for  which  the  partner- 
ship is  formed. 

41.  Who  May  be  an  Agent.  Any  one,  except  a  very  young 
child  and  persons  whose  interests  are  opposed  to  those  of  the  prin- 
cipal, may  act  as  agent.  A  child  may  be  employed  to  deliver  goods, 
and  thus  make  and  complete  contracts  for  his  principal.  Persons  of 
unsound  mind  may  serve  as  agents.  Persons  who  cannot  act  as  prin- 
cipal, through  lack  of  capacity  to  contract,  may  act  as  agent  for  others. 
For  example,  ^,  fourteen  years  old,  cannot  be  bound  by  a  contract 
with  B  for  the  purchase  of  one  hundred  bushels  of  wheat,  but  A  may 


COIMMERCIAL  LAW  31 

be  employed  as  agent  by  C,  a  competent  person,  to  purchase  of  B 
one  hundred  bushels  of  wheat. 

A  person  whose  interests  are  opposed  to  those  of  his  principal 
is  disqualified  from  acting  as  agent.  That  is,  a  person  cannot  be 
agent  for  both  parties  to  the  same  transaction.  For  example,  if  A 
is  employed  as  traveling  salesman  by  B  to  sell  goods,  he  cannot 
serve  as  agent  for  C  in  the  purchase  of  goods  from  B  without  the 
knowledge  and  consent  of  both  B  and  C. 

Artificial  persons,  such  as  partnerships  and  corporations  may 
act  as  agents.  It  is  usually  held  that  children  under  seven  years  of 
age  cannot  act  as  agents,  by  reason  of  tender  age. 

4!tf,.  How  Agents  May  be  Appointed.  Agents  may  be  appointed 
by  any  act  of  the  principal  which  shows  that  it  is  the  principal's 
will  that  the  agent  shall  act  as  the  principal's  representative. 

Agents  may  he  appointed  by  oral  statement,  by  written  docu- 
ment, by  conduct  on  the  part  of  the  principal,  or  by  ratification  of 
an  unauthorized  act. 

Most  agencies  are  created  by  oral  authority.  Any  word  by 
which  the  will  of  the  principal  is  manifested  is  sufficient.  A  tells  B 
to  order  a  barrel  of  flour  from  C.  This  constitutes  B  an  agent  for  A. 
B's  asking  A  if  he  shall  order  a  barrel  of  flour  from  C,  to  which  A 
nods,  constitutes  B,  A^s  agent.  A  writes  to  B  and  requests  him  to 
order  a  carload  of  flour  from  C.  This  constitutes  B,  A's  agent.  B, 
without  any  authority  from  A,  orders  a  car  load  of  flour  from  C, 
which  A  accepts,  and  for  which  he  promises  to  pay.  This  constitutes 
B,  A's  agent  by  ratification. 

Some  few  contracts  of  agency  must  be  in  writing.  A  employs 
B  to  act  as  his  salesman  for  a  period  of  two  years.  As  between  A 
and  B,  the  contract  is  not  enforceable,  by  reason  of  the  Statvie  oj  Frauds 
Qsee  Statute  of  Frauds,  chapter  on  Contracts).  But  as  between  A 
and  third  parties  dealt  with  by  B  as  agent,  A  cannot  refute  the 
agency. 

Some  contracts  which  must  be  made  in  writing,  such  as  land 
contracts  require  the  agent's  authority  to  be  in  writing. 

If  a  person  knowingly  permits  another  to  act  as  his  agent,  he 
cannot  afterwards  repudiate  the  agency.  For  example,  A  stands  by 
and  watches  B  sell  A 's  horse  to  C.  Although  B  had  no  authority  to 
make  the  sale,  A,  by  his  conduct,  cannot  claim  there  was  no  agency. 


32  COMMERCIAL  LAW 

Ap  agent's  assertion  of  agency  does  not  of  itself  constitute  an 
agency.  If  A,  without  /^'s  knowledge,  claims  to  C  to  have  authority 
to  sell  B's  horse  and  does  attempt  the  sale,  title  to  the  horse  does  not 
pass  to  C,  because  A  had  no  authority  to  make  the  sale.  A  mere 
declaration  of  authority  on  the  part  of  the  ageiit  without  the  knowl- 
edge or  consent  of  the  principal  does  not  create  an  agency. 

43.  Purposes  for  Which  an  Agency  May  be  Created.  With  the 
exception  of  fulfilling  contracts  for  personal  services,  a  person  may 
do,  through  an  agent,  anything  he  may  lawfully  do  by  himself.  For 
example,  A  employs  B,  an  artist  of  fame,  to  paint  a  picture.  Mani- 
festly B  cannot  employ  a  student  or  another  artist  to  paint  the  picture. 
A  contracted  for  B's  personal  skill  and  work,  and  cannot  be  made 
to  accept  the  work  of  another.  In  the  majority  of  business  transactions, 
however,  the  personal  element  does  not  enter.  The  thing  to  be  done, 
or  the  article  to  be  furnished,  is  the  feature  of  most  contracts.  By 
whom  the  thing  is  done,  or  by  whom  the  article  is  furnished,  does 
not  matter.  For  example,  A  purchases  one  hundred  bushels  of  wheat 
from  B.  B  delivers  the  wheat  through  his  agent.  Ordinarily  A 
cannot,  nor  does  he  wish  to  complain.  A  contracts  with  B  to  have 
B  furnish  him  an  oak  chair  of  given  dimensions.  B  employs  C  to 
make  and  deliver  the  chair.  A  cannot  complain  so  long  as  the  chair 
corresponds  to  the  terms  of  the  contract. 

A  party  cannot  do  through  another  what  he  himself  cannot  law- 
fully do.  For  example,  a  party  cannot  employ  an  agent  to  purchase 
votes  for  him.  Neither  can  a  person  lawfully  corrupt  legislators 
by  means  of  an  agent,  nor  lavidfully  commit  a  crime  by  means  of  an 
agent. 

44.  Ratification  of  Agency.  WTiere  a  person  assumes  to  act 
as  an  agent  for  another  without  authority,  or  in  performing  an  agency, 
exceeds  his  authority,  he  does  not  bind  the  person  for  whom  he  as- 
sumes to  act,  unless  such  person  subsequently,  with  knowledge  of 
the  fact,  consents  to  be  bound  thereby.  Such  assent  is  known  in 
law  as  ratification. 

A  person  cannot  ratify  an  act  which  he,  himself,  has  no  power 
to  perform.  For  example.  A,  pretending  to  act  for  B,  offers  C,  a 
legislator,  one  hundred  dollars  ($100.00)  to  vote  against  a  certain 
measure.  B  cannot  ratify  this  act,  since  he  himself  cannot  lawfully 
perform  it.     If  however,  A,  knowing  that  B  desires  a  certain  rare 


COMMERCIAL  LAW  33 

picture,  finds  it  and  orders  it  in  B's  name,  B  may  ratify  the  act  by 
accepting  and  paying  for  tlie  picture. 

Much  discussion  has  arisen  as  to  the  ability  of  a  person  to 
ratify  a  forgery  of  a  negotiable  instrument.  The  courts  differ  on 
this  question.  It  is,  however  settled  that  in  case  of  a  forgery,  if  the 
alleged  principal  fails  to  deny  the  signature  when  the  paper  is  pre- 
sented to  him,  or  by  remaining  silent,  induces  another  to  purchase  it, 
or  to  injure  his  position  by  reason  thereof,  the  alleged  principal  is 
astopped  from  further  denying  the  authenticity  of  the  signature,  and 
may  be  compelled  to  pay  the  instrument.  For  example.  A]  forges 
B's  name  to  a  promissory  note  payable  to  C.  C  presents  the  note  to 
B  for  payment.  B  may  refuse  to  pay  the  note  by  reason  of  forgery. 
If,  however,  A  forges  B's  name  to  a  note,  payable  to  C,  and  D  shows 
B  the  note,  saying  that  he  is  about  to  purchase  it  if  it  is  genuine,  and 
B  remains  silent  and  permits  D  to  buy  the  note,  B's  silence  amounts 
to  a  ratification  of  the  forgery  and  he  must  pay  the  note  to  D. 

When  an  alleged  principal's  attention  is  called  to  the  fact  that 
an  alleged  agent  has  assumed  to  act  as  his  agent,  he  must  choose 
between  repudiating  the  act  and  accepting  it.  This  choice  is  known 
in  law  as  the  principal's  right  of  election. 

45.  Classification  of  Agents.  Agents  are  usually  classified 
as  universal,  general  or  special.  By  universal  agent  is  meant  an 
agent  empowered  to  represent  his  principal  in  every  capacity.  A 
principal  could  have  only  one  universal  agent.  In  business  affairs, 
a  universal  agency  is  seldom,  if  ever,  found.  It  is  useful,  however, 
as  a  classification  to  show  the  different  kinds  of  agents,  depending 
upon  the  degree  of  their  authority. 

A  general  agent  is  one  authorized  to  perform  all  the  duties  of 
his  principal  of  a  certain  kind.  A,  an  insurance  company,  appoints 
B  its  sole  agent  to  solicit  insurance  in  the  city  of  Boston.  5  is  a 
general  agent  for  the  purpose  of  soliciting  insurance  in  the  city  of 
Boston.     General  agencies  are  common  in  business  practice. 

A  special  agent  is  one  authorized  to  act  for  his  principal  in  a 
particular  matter  or  transaction.  For  example,  A  employs  B,  an 
attorney,  to  try  a  certain  law  suit.     B  is  u  special  agent. 

In  practice  it  is  not  always  easy  to  determine  whether  an  agent 
is  a  general  or  a  special  one.  A  principal  does  not  always  limit  his 
agent's  powers  by  actual  authority  conferred  upon  the  agent.     His 


34  COMMERCIAL  LAW 

intention  and  his  instructions  to  the  agent  may  limit  the  latter's 
authority,  but  third  persons  may  rely  upon  the  apparent  authority 
of  the  agent,  rather  than  the  actual.  For  example,  A  employs  B  as 
a  traveling  salesman  to  sell  dry  goods.  He  instructs  B  not  to  sell 
any  bills  less  than  five  hundred  dollars  ($500.00)  in  amount.  B  sells 
C  a  bill  amounting  to  four  hundred  dollars  ($400.00),  C  does  not 
know  of  the  limitation  of  B's  authority.  A  is  bound  by  B's  sales 
to  C.  C  has  the  right  to  rely  upon  B's  apparent  authority.  A  has 
given  B  actual  authority  to  sell  goods,  and  this  authority  carries  vi^ith 
it  the  implied  or  apparent  authority  to  sell  in  any  reasonable  amounts. 
Actual  authority  to  do  certain  things  carries  with  it  the  right  to 
do  those  things  which  impliedly,  or  from  custom  or  usage  apparently 
accompany  the  authority  conferred. 

Third  persons  dealing  with  an  agent  must,  on  the  other  hand, 
ascertain  at  their  peril  that  an  agent  has  the  authority  claimed.  For 
example,  if  A,  without  authority,  claims  to  be  agent  for  B,  and  sells 
an  order  of  goods  to  C,  and  collects  from  C  a  certain  amount,  when 
in  fact  he  is  not  the  agent  of  B,  C  has  no  contract  with  B.  A  third 
person  dealing  with  an  agent  must  ascertain  at  his  peril,  that  the  al- 
leged agent  has  authority  from  his  principal  to  act  as  agent  in  a  cer- 
tain capacity.  When  this  is  ascertained,  the  third  person  has  a  right 
to  treat  the  agent  as  having  the  authority  to  do  all  the  things  neces- 
sarily or  customarily  belonging  to  his  agency. 

46.  Duties  of  Principal  to  Agent.  The  relation  of  a  principal 
to  his  agent  arises  out  of  a  contract,  express  or  implied.  The 
contract  may  expressly  provide  that  the  agent  is  to  receive  a  specified 
sum  for  his  services.  In  this  event,  the  principal  is  legally  liable  to 
pay  this  amount  to  his  agent.  The  principal  may  have  a  defense 
to  his  contract,  the  same  as  to  any  contract.  But  if  the  agent  has 
performed  his  contract  of  agency,  he  can  enforce  payment  therefor. 
For  example,  A  employs  B  to  sell  furniture  for  a  compensation  of 
one  hundred  dollars  ($100.00)  per  month  and  expenses,  the  contract 
to  cover  a  period  of  twelve  months.  WTien  B  performs  this  senice, 
he  may,  by  legal  action,  compel  B  to  pay  him  one  thousand  two 
hundred  dollars  ($1,200.00).  If  B  fails  to  work  for  A  as  provided 
for  by  the  terms  of  the  contract,  and  at  the  expiration  of  six  months 
enters  C's  employ,  in  most  jurisdictions,  he  can  recover  nothing  from 
A,  since  he  has  not  fulfilled  his  contract.     In  some  jurisdictions,  he 


COMlSiERCIAL  LAW  35 

may  recover  from  A  the  value  of  his  services,  less  the  damages  A  has 
suffered  by  reason  of  breach  of  contract. 

Many  agencies  are  created  without  any  express  provision  as  to 
compensation.  In  this  event,  a  contract  relation  exists,  as  much  as 
in  the  former  case.  There  is  an  implied  contract  that  the  agent  shall 
receive  a  reasonable  compensation  for  his  services.  For  example, 
A,  a  contractor,  requests  B,  a  teamster,  to  haul  stone  for  the  con- 
struction of  a  bridge.  B  works  for  A  a  week,  nothing  having  been 
said  as  to  compensation.  B  can  recover  from  A  the  reasonable  and 
customary  value  of  his  services. 

There  is  also  a  duty  on  the  part  of  the  principal  to  protect  his 
agent  against  unnecessary  risks  of  injury.  There  is  a  duty  on  the 
part  of  a  master  to  protect  his  servant.  An  agent  or  servant  assumes 
the  risks  which  naturally  belong  to  the  kind  of  work  in  which  he  is 
engaged.  For  example,  A  employs  B  to  work  in  a  saw  mill.  B 
assumes  the  risks  incident  to  the  employment.  If  a  log  accidentally 
rolls  on  him,  A  is  not  liable  in  damages,  or  if  B  carelessly  cuts  his 
hand  on  the  saw,  A  is  not  responsible.  But  if  the  boiler  explodes 
through  carelessness  of  ^,  or  if  the  saw  flies  to  pieces  on  account  of 
wear,  and  injures  B,  A  is  Uable. 

It  is  said  that  a  principal  or  master  is  obliged  to  furnish  his  agent 
or  servant  with  a  reasonably  safe  place  in  which  to  work,  and  with 
reasonably  safe  tools  and  instruments  with  which  to  work.  If  the 
principal  negligently  fails  to  these  things,  and  the  servant  is  injured 
without  negligence  and  carelessness  on  his  part,  the  principal  is  liable 
to  him  in  damages  for  any  injuries. 

47.  Duties  and  Liabilities  of  Principal  to  Third  Persons.  When 
a  person  employs  another  to  act  for  him,  he  is  liable  to  third  persons 
for  the  acts  performed  by  the  agent,  so  long  as  the  agent  acts  within 
his  authority.  If  A  appoints  B  his  agent  to  purchase  live  stock,  A 
must  pay  third  persons  for  the  live  stock  purchased  in  his  name  by 
B.  A  person  employing  another  to  act  as  his  agent  is  responsible 
to  third  persons  for  acts  performed  by  the  agent,  which  are  within 
the  apparent  authority  of  the  agent,  as  well  as  for  the  acts  which  are 
within  the  actual  authority.  If  A  appoints  B  his  agent  to  purchase 
live  stock  and  instructs  him  to  purchase  only  hogs,  but  limits  his 
authority  to  pay  over  five  cents  per  pound,  and  B  purchases  at  five 
and  a  half  cents  from  C,  who  does  not  know  of  this  limitation,  A  is 


36  COMMERCIAL  LAW 

bound  by  the  contract.  In  giving  an  agent  authority  to  do  certain 
things,  the  agency  carries  with  it  the  customary  or  imphed  authority 
to  perform  those  acts  incident  to  the  general  character  of  the  agency. 
Thus,  authority  to  purchase  usually  carries  with  it  authority  to  fix 
the  price.     This  is  especially  true  of  authority  to  sell. 

Notice  to  an  agent  is  notice  to  a  principal.  If  an  agent  is  author- 
ized to  sell  goods,  and  in  making  a  sale,  is  notified  by  the  purchaser 
that  the  goods  are  purchased  conditionally,  in  the  absence  of  any 
special  instruction  limiting  the  power  of  the  agent  to  sell  condition- 
ally, brought  to  the  attention  of  the  purchaser,  the  principal  will  be 
bound  by  the  condition. 

A  principal  is  liable  to  third  persons  for  his  agent's  torts  or 
wrongful  acts.  If  A  directs  his  agent  B  to  destroy  C's  property,  A 
is  liable  to  C  for  the  damage  done.  A  principal  is  not  only  liable  to 
third  persons  for  the  damages  done  under  his  express  direction  by  his 
agent,  but  he  is  also  liable  for  the  acts  carelessly  done  by  the  agent 
in  the  course  of  his  employment.  A  street  car  company  employs 
B  as  motorman.  B,  carelessly  and  negligently,  while  operating  a 
car  runs  over  C.  A  is  liable  for  B's  negligent  act.  A  principal, 
however,  is  not  liable  for  the  wrongful  acts  of  his  agent,  performed 
outside  of  his  employment.  A,  a  street  car  company,  employs  B  as 
conductor;  C,  standing  on  the  street  insults  B.  B  stops  his  car,  gets 
off  and  assaults  and  injures  C.  A  is  not  liable,  since  B  did  not  commit 
the  act  complained  of  while  in  the  course  of  his  employment,  but 
went  outside  the  course  of  his  employment  and  acted  on  his  own 
behalf. 

48.  Duties  and  Liabilities  of  Agent  to  Principal.  An  agent 
must  obey  the  instructions  of  his  principal.  If  he  disobeys  his  in- 
structions, he  is  liable  to  his  principal  for  losses  sustained.  For  ex- 
ample, if  A  employs  B  to  sell  flour  at  four  dollars  ($4.00)  per  barrel 
and  B  sells  one  hundred  barrels  at  three  dollars  and  seventy-five 
cents  ($3.75),  he  must  respond  in  damages  to  A  for  twenty-five  cents 
a  barrel.  If,  however,  a  discretion  is  given  the  agent,  and  he  makes 
a  reasonable  mistake  in  using  his  discretion,  he  is  not  liable.  If  his 
instructions  are  not  clear,  and  he  carries  out  what  he  thinks  are  his 
instructions,  which  prove  not  to  be  the  desire  or  intention  of  his  prin- 
cipal, he  is  not  liable. 

An  agent  must  account  to  his  principal  for  money  collected,  and 


COMMERCIAL  LAW  37 

for  moneys  or  property  coming  into  his  possession  by  reason  of  his 
agency.  If  he  deposits  money  in  his  own  name  and  it  is  lost  through 
a  bank  failure,  he  is  responsible  to  his  principal.  If  he  carefully 
deposits  it  in  the  name  of  his  principal  and  the  bank  fails,  he  is  not 
responsible. 

An  agent  must  act  carefully  in  the  preformance  of  his  principal's 
work,  or  as  it  is  usually  said,  he  must  not  act  carelessly  or  negligently. 
He  must  act  as  a  reasonably  prudent  man  would  act,  under  similar 
circumstances,  or  be  liable  to  his  principal  in  damages. 

An  agent  must  be  loyal  to  his  principal's  interests.  He  cannot 
act  secretly  for  another.  He  cannot  act  secretly  as  agent  for  both 
parties  to  a  transaction.  If  he  makes  profits  in  his  agency  dealings, 
he  must  account  for  them  to  his  principal.  A  employs  B  to  sell 
Christmas  novelties.  B,  shortly  before  Christmas  receives  a  large 
order  from  C,  who  offers  B  one  hundred  dollars  ($100.00)  in  excess 
of  the  regular  price,  if  the  goods  arrive  the  following  day.  B  succeeds 
in  having  the  goods  reach  C  the  following  day.  B  must  account  for 
the  extra  one  hundred  dollars  ($100.00)  to  A,  his  principal. 

An  agent  must  faithfully  carry  out  his  agency.  He  is  responsible 
for  failure  to  act  loyally.  A  employs  B  to  sell  butter.  B  obtains 
an  offer  from  C,  a  rival  butter  manufacturer,  to  commence  work  for 
him  on  commission  two  weeks  hence.  B  tells  his  customers  not 
to  purchase  for  two  weeks,  at  which  time  he  can  make  them  a  better 
price.  B  is  liable  to  A  in  damages  for  this  act  of  disloyalty.  He 
has  broken  his  contract. 

An  agent,  who  is  employed  to  perform  personal  services,  cannot 
transfer  his  responsibility  or  agency  to  another. 

One  who  agrees  to  act  as  agent  for  another  without  compensa- 
tion, cannot  be  forced  to  fulfil  his  agency.  He  is  not  liable  in  damages 
to  his  principal  for  failure  to  act,  but  if  he  chooses  to  act  without 
compensation,  he  is  liable  if  he  acts  with  great  negligence.  If  .1 
requests  B  to  drive  his  horse  home  and  B  drives  the  horse  and  leaves 
him  without  tying  him,  and  the  horse  runs  away  and  destroys  the 
carriage  and  ruins  himself,  B  is  liable  for  gross  negligence. 

49.  Rights  and  Liabilities  of  Agent  to  Third  Persons.  An 
agent  acting  wuthin  the  scope  of  his  authority,  in  making  contracts 
with  third  persons,  binds  his  principal  by  the  contract,  but  does  not 
bind  himself.    A  is  authorized  by  B  to  purchase  a  horse.   A  purchases 


38  COMIMERCIAL  LAW 

a  horse  from  C,  notifying  C  that  he  is  purcliasing  as  agent  for  B. 
C  must  look  to  B  for  the  purchase  price, since  A  acted  solely  as  agent 
and  is  not  personally  liable  under  the  contract. 

If  an  agent,  intending  to  act  as  agent,  makes  a  contract  in  hii- 
own  name,  without  informing  the  third  party  with  whom  he  is  dealing, 
of  the  agency,  he  binds  himself.  Under  these  circumstances,  he  usually 
binds  his  principal  also.  This  question  is  discussed  more  at  length 
under  the  title  "Undisclosed  Principal."  If  A  is  employed  by  B  to 
purchase  a  horse,  and  A  purchases  a  horse  from  C  for  two  hundred 
dollars  ($200.00),  without  telling  C  of  the  agency,  the  purchase  price 
to  be  paid  the  following  day,  A  binds  himself  personally  to  pay  C 
the  two  hundred  dollars  ($200.00)  and  C  is  not  obliged  to  look  to  B 
for  payment. 

If  an  agent,  honestly  believing  he  has  authority  to  act  as  agent 
when  he  has  not,  makes  a  contract  as  agent  for  his  supposed  prin- 
cipal, he  binds  himself  personally  and  not  his  principal,  A  writes 
to  B,  "Purchase  for  me  C's  bay  team,  if  same  can  be  secured  for  two 
hundred  and  fifty  dollars  ($250.00),  half  payable  in  six  months."  B 
reads  the  letter  aud  purchases  the  team  in  the  name  of  A  for  two 
hundred  and  fifty  dollars  cash  ($250.00),  overlooking  the  condition 
in  A's  letter  that  half  was  to  be  paid  in  six  months.  B  binds  himself 
to  C  and  does  not  bind  A. 

^^^len  an  agent  falsely  or  fraudulently  represents  himself  as  agent, 
he  binds  himself  and  not  his  alleged  principal. 

If  an  agent,  honestly  believing  he  has  authority  to  act,  does  not 
have  such  authority,  but  discloses  all  the  facts  connected  with  his 
authority,  to  the  third  person  with  v/hom  he  is  dealing,  he  is  not  per- 
sonally bound.  A,  having  previously  acted  as  agent  for  B,  in  pur- 
chasing onions  by  the  crate,  receives  the  following  wire  from  B, 
"Purchase  one  hundred  crates,  ship  at  once."  A,  supposing  this 
refers  to  the  purchase  of  onions,  shows  the  telegram  to  C,  and  tells 
him  that  in  the  only  other  transaction  in  which  he  acted  for  B  he 
purchased  onions,  and  that  he  supposes  this  wire  refers  to  onions. 
He  purchases  one  hundred  crates  of  onions  from  C,  and  later  discovers 
that  B  intended  turnips,  instead  of  onions.  A  is  not  bound  personally. 
He  has  acted  honestly  and  revealed  all  the  facts  in  his  possession  to 
C,  who  must  act  at  his  risk  as  to  A's  actual  authority. 

50.     Undisclosed  Principal.     A    principal,  whose    agent    deals 


COMMERCIAL  LAW  39 

with  a  third  person  for  his  benefit,  without  disclosing  the  name  of 
his  principal,  or  perhaps  without  disclosing  the  fact  of  agency,  is 
said  to  be  an  undisclosed  principal.  For  example,  A  employs  B  to 
purchase  one  hundred  crates  of  oranges.  B  purchases  the  oranges 
from  C  for  A  in  his  own  name,  not  telling  C  that  the  purchase  is  made 
for  A.     In  this  case,  A  is  an  undisclosed  principal. 

As  a  general  rule  an  undisclosed  principal,  when  discovered, 
is  liable  upon  the  contract  of  his  agent. 

In  case  of  an  undisclosed  principal,  the  agent  is  liable  personally 
as  well  as  the  undisclosed  principal.  If  A  instructs  B  to  purchase 
for  him  five  cars  of  coal,  and  B  purchases  the  coal  of  C  in  his  own 
name,  without  disclosing  the  fact  of  his  agency,  B  is  personally  liable 
to  C  for  the  purchase  price. 

The  undisclosed  principal  is  not  liable  to  a  third  party  if  the 
third  party  with  full  knowledge  of  the  agency,  elects  to  hold  the 
agent.  If  A  employs  B  to  purchase  goods  for  him,  and  B  purchases 
the  goods  in  his  own  name  from  C,  and  C,  before  payment,  learning 
that  the  goods  were  purchased  for  A,  elects  to  hold  the  agent  B,  by 
suing  him  for  the  purchase  price,  or  by  doing  or  saying  anything 
that  shows  his  determination  to  hold  the  agent,  rather  than  the  prin- 
cipal, he  cannot  thereafter  hold  A. 

The  undisclosed  principal  may  enforce  against  third  persons 
the  contract  of  his  agent.  If  A  employs  B  to  purchase  goods  from  C 
and  B  makes  the  purchase  in  his  own  name  for  future  delivery,  A 
may  compel  C  to  deliver  the  goods  to  him.  This  rule  applies  in  all 
cases  where  the  third  party  is  not  injured  by  its  application. 

The  liability  of  an  undisclosed  principal  to  third  persons,  upon 
contracts  made  by  an  agent  in  the  agent's  name,  is  subject  to  the 
further  exception,  that  when  the  third  party  has  led  the  undisclosed 
principal  to  believe  that  he  is  looking  to  the  agent  alone  for  fulfillment 
of  the  contract,  and  relying  upon  such  conduct  the  undisclosed 
principal  settles  with  the  agent,  he  is  no  longer  liable  to  the  third 
party.  In  this  event  the  third  person  is  said  to  be  estopped  from 
the  right  to  sue  the  undisclosed  principal.  This  rule  is  based  upon 
equitable  reasons.  There  can  be  no  such  thing  as  undisclosed  prin- 
cipal in  case  of  a  negotiable  instrument.  No  one  is  liable  on  a  nego- 
tiable instrument,  such  as  a  note,  draft,  or  check,  except  the  maker, 
indorser,  drawer  or  acceptor. 


40  rOMMERCTAT>  LAW 

51.  Apparent  Authority  of  Agent.  While  it  is  true  that  an 
agent  must  have  authority  from  his  principal,  before  he  can  bind  his 
principal  in  the  capacity  of  agent,  and  while  it  is  equally  true  that 
third  persons,  in  dealing  with  agents,  must  determine  at  their  peril 
that  the  agent  has  actually  received  authority  to  act  for  his  principal, 
a  third  party  has  the  right  to  rely  upon  the  implied  and  customary 
powers  accompanying  an  actual  authority  conferred  upon  an  agent. 
Few  contracts  are  made  express  in  all  their  terms.  Language  is  not 
susceptible  of  such  nicety.  In  the  express  or  implied  contracts  used 
in  creating  agencies,  many  things  are  implied.  A  third  person  deal- 
ing with  an  agent,  is  not  limited  by  the  actual  authority  conferred 
upon  the  agent  by  his  principal,  if  the  character  of  the  authority  ap- 
parently confers  other  customary  or  implied  powers.  Third  per- 
sons are  said  to  have  the  right  to  rely  upon  the  apparent  rather  than 
upon  the  actual  authority  of  the  agent.  This  does  not  mean  that  an 
agent  can  create  an  agency  and  bind  his  principal  without  having 
received  any  authority  from  his  principal  to  act  as  agent,  but  means 
that  where  an  authority  of  a  certain  character  has  been  conferred 
upon  an  agent,  third  parties  dealing  with  the  agent,  have  a  right  to 
rely  upon  the  apparent  or  customary  powers  conferred,  rather  than 
upon  any  secret  or  unexpected  limitations  upon  such  authority.  For 
example,  an  agent  has  authority  to  sell  silk  goods  and  to  make  ex- 
changes in  silk.  This  authority  is  printed  on  the  order  sheets  fur- 
nished the  agent.  The  agent  exhibits  these  order  sheets  to  the  cus- 
tomer and  exchanges  are  made.  The  principal  cannot  claim  that 
the  agent  had  authority  to  exchange  only  goods  of  the  principal's 
manufacture.  The  authority  conferred  upon  the  agent  to  make  ex- 
changes, apparently  was  to  make  exchanges  of  any  silks.  The  prin- 
cipal cannot  complain  if  third  parties  rely  upon  the  apparent  authority. 

52.  Secret  Instructions.  So  long  as  the  agency  is  legal,  a 
principal  may  create  an  agency  of  as  limited  an  extent,  or  of  as  broad 
a  nature  as  he  desires.  So  long  as  the  limitations  which  the  principal 
places  upon  his  agent's  authority  are  not  of  a  nature  to  mislead  third 
persons,  the  agent  cannot  bind  his  principal  by  exceeding  these  limita- 
tions. But  if  a  principal  confers  an  authority  upon  an  agent  which  im- 
pliedly embraces  a  number  of  powers,  the  principal  cannot  limit 
these  powers  by  secret  instructions.  The  limitations  upon  an  agent's 
apparent  authority  must  be  brought  to  the  attention    of  the  third 


COMMERCIAL  LAW  41 

party.  For  example,  A,  a  wholesale  dry  goods  dealer,  may  employ 
B,  a  salesman,  to  take  written  orders  only.  If  B  attempts  to  take 
oral  orders,  the  principal,  A,  will  not  be  bound  thereby.  But  if  A 
gives  B  authority  to  take  written  orders  only,  and  secretly  instructs 
B  to  take  no  order  less  than  fifty  dollars  ($50.00)  in  amount,  or  in 
excess  of  two  thousand  dollars  ($2,000.00),  and  B  takes  C's  order 
for  forty-five  dollars  ($45.00),  C  not  knowing  of  this  limitation,  A  is 
bound.  If,  however,  A  instructs  B  to  take  only  written  orders,  and  in 
amounts  ranging  only  from  fifty  dollars  ($50.00)  to  two  thousand 
dollars  ($2,000.00),  and  prints  these  conditions  plainly  upon  the  order 
blank,  C,  in  signing  one  of  these  order  blanks  for  forty-five  dollars 
($45.00),  does  not  bind  A.  In  this  case,  A  has  placed  the  limitation 
of  B's  authority  in  C\s  possession. 

53.  Wrongful  Acts  of  Agent.  An  agent  is  personally  respon- 
sible for  wrongful  acts  committed.  The  fact  that  he  acts  in  a  repre- 
sentative capacity,  does  not  excuse  him  from  committing  wrongs, 
nor  does  It  relieve  him  from  personal  liability  therefor.  The  principal, 
as  well  as  the  agent,  is  liable  for  the  wrong  committed,  if  authorized. 
If  A  instructs  his  agent,  B,  to  sell  goods  by  fraudulent  representations 
and  B,  by  means  of  said  fraud,  sells  goods  to  C,  B  personally,  as  well 
as  A  is  liable  to  C,  for  the  wrongful  act.  In  the  language  of  the  courts, 
an  agent  Is  liable  to  third  parties  for  malfeasance,  but  not  for  mis- 
feasance. That  is,  an  agent  is  liable  to  a  third  party  for  wrongful 
acts  done,  but  is  not  liable  to  third  parties  for  mere  failure  to  observe 
the  terms  of  his  agency.  In  the  latter  case,  he  Is  liable  to  his  principal 
only. 

54.  Delegation  of  Authority  and  Sub=agents.  AMiere  per- 
sonal judgment  and  discretion  are  required  of  an  agent,  he  cannot 
transfer  his  duties  to  another,  without  the  consent  of  his  principal. 
A,  a  wholesale  dry  goods  merchant,  employs  B,  an  experienced 
traveling  salesman,  to  sell  goods.  B,  by  his  contract,  is  bound  to 
give  his  personal  skill  to  A  and  cannot  employ  C  to  act  as  salesman 
for  him.  A  presumptively  employs  5  to  use  his  own  skill  and  judg- 
ment.    B  Is  not  permitted  to  delegate  his  authority  to  another. 

Where,  however,  mere  mechanical  or  ministerial  work  is  to  be 
performed  the  agent  is  permitted  to  employ  others  to  assist  him,  or 
to  perform  the  work.  For  example,  A  employs  B,  an  expressman, 
to  carry  his  trunk  to  the  depot.     B  may  employ  a  boy  to  assist  him 


42  COMMERCIAL  LAW 

in  performing  the  work,  or  may  employ  another  to  perform  the  work. 
Usage  and  custom  have  much  to  do  in  determining  whether  or  not 
an  agent  is  permitted  to  delegate  his  authority.  The  performance 
of  a  mere  ministerial  duty  may  be  delegated.  A  employs  B  to  act 
as  stenographer  in  reporting  the  trial  of  a  case.  When  it  comes  to 
writing  out  the  testimony,  B  may  perform  the  task  himself,  or  delegate 
it  to  another. 

When  an  agent  employs  a  subordinate,  or  delegates  his  authority 
to  another  on  his  own  responsibility,  the  agent  stands  as  principal 
for  the  sub-agent,  and  the  original  principal  is  not  responsible  to 
third  persons  for  the  acts  of  the  sub-agent.  If,  however,  the 
agent  is  authorized  by  the  principal  to  appoint  a  sub-agent,  the  agent 
is  bound  only  to  exercise  care  in  the  selection  of  such  sub-agent,  and 
the  original  principal  is  liable  to  third  persons  for  his  acts.  The 
sub-agent  is  answerable  to  the  principal,  and  not  to  the  agent  for  his 
acts.  For  example.  A,  a  florist,  employs  B  to  deliver  a  box  of  flowers. 
B  employs  C.  The  nature  of  the  duty  is  such  that  B  may  delegate 
it.  But  if  C  is  negligent  in  the  performance  of  the  work,  B  is  liable 
to  A  for  the  negligence,  for  the  reason  that  A  did  not  expressly  or 
impliedly  direct  B  to  employ  another. 

A,  in  Chicago,  deposits  for  collection,  a  check  drawn  on  a  New 
York  bank.  A  knows  that  it  is  the  custom  of  bankers  to  employ 
other  banks  for  the  purpose  of  making  collections.  If  the  Chicago 
bank  uses  due  care  in  selecting  another  bank  to  assist  in  making  the 
collection,  and  this  bank  makes  the  collection  and  fails  before  the 
Chicago  bank  receives  the  money,  A  must  stand  the  loss,  and  not  the 
Chicago  bank.  A  authorized  the  employment  of  a  sub-agent.  There 
is  some  conflict  of  authority  ob  the  legal  question  involved  in  the 
above  example. 

55.  Agent's  Authority  to  Collect.  An  agent  authorized  to 
solicit  orders  is  not  thereby  authorized  to  make  collections  on  such 
orders.  If,  however,  the  agent  is  entrusted  with  the  goods,  and  de- 
livers them  at  the  time  the  sale  is  made,  he  is  authorized  to  receive 
payment  therefor. 

An  agent  authorized  to  sell,  is  not  authorized  to  exchange  or  trade 
goods.  He  is  authorized  to  make  sales  for  cash  only.  If  he  accepts 
checks,  or  sells  on  credit,  he  is  personally  liable  for  losses.  There  is 
a  tendency  at  present  to  permit  the  agent  to  accept  checks  in  pay- 


COMMERCIAL  LAW  43 

ment.  The  custom  of  making  payment  by  check  is  so  well  recog- 
nized in  many  Unes  of  business,  that  in  some  transactions  it  impliedly 
gives  an  agent  this  authority.  This  was  not  formerly  the  rule,  and 
is  still  disputed  by  many  courts. 

56.  Agent's  Signature  to  Written  Instruments.  The  proper 
method  for  an  agent  to  employ  in  signing  a  written  instrument,  as 
agent,  is  to  describe  himself  as  agent  for  his  principal  in  the  body  of 
the  instrument,  and  then  sign  his  principal's  name  at  the  end  thereof, 
by  himself  as  agent.  For  example,  if  yl,  is  agent  for  B  in  making 
a  contract  of  sale,  the  body  of  the  instrument  should  state  that  "B  by  A, 
his  agent,  agrees,"  and  the  signature  should  be 

(5 ) 

(by  A,  his  agent) 
If  the  contract  is  merely  signed  "A,  agent,"  the  agent  probably 
binds  himself  only.  This  is  especially  true  in  case  of  sealed  instru- 
ments, such  as  deeds.  In  case  of  promissory  notes,  an  agent  who 
has  authority  to  make  such  instruments,  may  make  them  in  the  name 
of  his  principal  without  using  his  own  name  at  all.  The  more  com- 
mon form,  however,  is  to  sign  the  principal's  name,  per  the  agent  as 
agent,  or  to  sign  the  agent's  name  as  agent  for  the  principal,  giving 
the  principal's  name.  The  mere  signing  of  the  agent's  name  as  agent 
is  a  mere  description,  and  probably  binds  the  agent  and  not  the 
principal.  For  example,  if  A  is  agent  and  B  the  principal,  a  promis- 
sory note  executed  by  the  agent  should  be  signed 

(B ) 

(by   A,  his   agent) 
A  simple  contract  should  state  in  the  the  body  of  the  instrument 
that  A,  as  agent  for  5,  is  making  the  contract,  and  the  contract  should 
be  signed 

(fi ■ ) 

(by  A,  his  agent) 
or  A,  agent  for  B.  A  promissory  note  or  simple  contract  made  and 
signed  in  the  name  of  the  principal,  the  agent's  name  not  appearing, 
is  probably  binding,  but  it  is  not  good  business  practice.  The  exact 
condition  of  affairs  should  be  shown,  and  the  name  of  the  agent,  as 
well  as  that  of  the  principal,  should  appear  in  the  document. 

57.  Authority  of  Agent  to  Warrant.  As  to  whether  or  not 
an  agent  authorized  to  sell  personal  property  has  implied  authority 


44  COMMERCIAL  LAW 

to  warrant  its  quality,  is  not  uniformly  settled.  If  there  is  any  rule 
on  the  question,  it  probably  is  controlled  by  usage  and  custom.  If 
there  is  a  general  well  known  custom  to  warrant  a  particular  article, 
the  agent  has  implied  authority  to  warrant  the  quality  of  the  article 
sold.  If  no  such  usage  or  custom  exists,  or  if  the  usage  or  custom  is 
purely  local  and  not  general  in  its  application,  the  agent  has  no 
authority  to  warrant  the  quality  of  the  goods  sold.  It  must  be  re- 
membered that  a  principal  is  bound  by  the  general  character  of 
authority  he  confers  upon  his  agent,  by  the  agent's  apparent  authority 
rather  than  by  the  actual  authority,  unless  the  latter  is  actually  brought 
to  the  notice  of  third  parties.  It  has  been  held  that  an  agent  author- 
ized to  sell  a  horse  is  authorized  to  warrant  the  soundness  of  the 
horse,  and  that  an  agent  authorized  to  sell  reapers  is  authorized  to 
warrant  their  durability  and  fitness.  It  was  held  that  a  principal, 
who  authorized  an  agent  to  sell  goods  at  a  certain  price,  did  not  au- 
thorize the  agent  to  warrant  to  third  persons  that  his  principal  would 
not  sell  to  others  at  a  less  price. 

58.  Factors.  A  factor,  usually  called  a  commission  man  or  con- 
signee, is  an  agent  entrusted  with  possession  of  his  principal's  goods, 
and  ordinarily  empowered  to  sell  in  his  own  name.  Like  any  agent 
who  has  possession  of  his  principal's  goods  with  power  to  sell,  a  factor 
has  power  to  collect.  He  differs  from  a  broker  in  that  he  has  posses- 
sion of  the  goods  of  his  principal,  and  is  authorized  to  sell  in  his  own 
name,  rather  than  in  the  name  of  his  principal. 

In  the  absence  of  contrary  custom  or  express  direction,  a  factor 
may  sell  on  credit.  A  factor,  until  instructed  otherwise,  may  use  his 
discretion  as  to  the  time  and  price  of  sales,  and  is  entitled  to  deduct 
his  commission  based  upon  custom  in  the  absence  of  special  con- 
tract. 

A  factor  may  sue  the  purchaser  in  his  own  name,  for  the  purchase 
price.  The  principal  may  sue  in  his  own  name  also.  Persons  dealing- 
with  factors  may  hold  the  principal  responsible  for  the  contracts  and 
representations  of  the  factor,  the  same  as  any  undisclosed  principal. 
Factors  are  also  personally  liable  to  third  persons  for  their  contracts. 

A  factor  must  account  to  his  principal  for  money  collected,  less 
his  commission  and  expenses.  He  is  not  obliged  to  keep  such  money 
separate  from  his  own,  but  he  must  keep  accurate  account  of  same,  and 
remit  promptly  when  it  is  due,  according  to  custom  or  special  contact. 


COMMERCIAL  LAW  45 

59.  Brokers.  A  broker  differs  primarily  from  a  factor  in  that 
ordinarily  he  does  not  have  possession  of  the  article  dealt  in,  and 
acts  in  the  name  of  his  principal  rather  than  in  his  own  name.  There 
are  many  kinds  of  brokers  engaged  in  common  business  life.  Some 
of  these  are  insurance  brokers,  pawnbrokers,  bill  and  note  brokers, 
and  merchandise  brokers.  In  the  absence  or  special  authority,  a 
broker  does  not  have  authority  to  collect. 

60.  Auctioneers.  An  auctioneer  is  a  special  kind  of  agent 
employed  to  dispose  of  goods  to  the  highest  bidder  at  a  public 
sale. 

Some  states  provide  by  statute  that  auctioneers  must  be  licensed, 
and  that  they  may  charge  only  certain  fees.  Most  licensed  auc- 
tioneers are  required  to  give  bond.  In  the  absence  of  statutory  regu- 
lations, any  person  competent  to  perform  the  duties  of  an  auctioneer 
may  so  act.  An  auctioneer  differs  from  an  ordinary  agent  in  that, 
in  some  respects,  he  is  agent  for  both  seller  and  purchaser.  He  is 
agent  for  the  seller  in  offering  the  goods  for  sale,  and  in  obtaining 
bids.  When  the  highest  bid  is  received,  however,  and  the  hammer 
falls,  he  is  deemed  to  be  agent  for  the  purchaser,  with  authority  to 
complete  the  sale  in  the  purchaser's  name.  If  the  contract  of  sale 
is  within  the  Statute  of  Frauds  and  required  to  be  in  WTiting,  the 
auctioneer  has  the  authority  of  the  purchaser  to  sign  his  name  to  a 
memorandum  of  sale,  either  by  himself  or  through  his  clerk.  The 
bidder  is  bound  by  this  contract,  made  in  his  presence  at  the  time 
and  place  of  the  sale. 

The  owner  may  fix  such  reasonable  terms  as  he  chooses,  and 
the  auctioneer  must  follow  out  the  terms  made  by  the  owner.  If  an 
owner  advertises  the  terms  of  the  sale,  bidders  are  deemed  to  have 
notice  of  these  terms.  These  terms  cannot  be  varied  by  the  auc- 
tioneer. If,  however,  the  owner  publishes  no  special  terms  of  sale, 
the  auctioneer  has  implied  authority  to  fix  customary  and  reasonable 
terms.  Bidders  have  the  right  to  rely  on  such  terms  and  the  prin- 
cipal is  bound  by  them. 

In  the  absence  of  special  instructions  to  the  contrary,  an  auctioneer 
must  sell  for  cash.  He  has  possession  of  the  goods,  consequently 
has  implied  authority  to  receive  payment  of  the  price.  He  has  no 
implied  authority  to  warrant  the  goods.  He  cannot  bid  in  his  own 
interest.     If  bidders  fraudulently  combine  not  to  bid  against  each 


46  COMMERCIAL  LAW 

other,  for  the  purpose  of  obtaining  the  goods  at  a  cheap  price,  do  title 
passes  to  the  highest  bidder,  by  reason  of  the  fraud. 

So  long  as  the  auctioneer  acts  within  his  authority  and  reveals 
the  name  of  his  principal,  he  incurs  no  personal  liability.  But  if  he 
exceeds  his  authority  in  making  a  sale  he  is  liable  in  damages  to  his 
principal.  If  he  does  not  reveal  the  name  of  his  principal  to  bidders, 
he  is  liable  personally  to  them. 

An  auctioneer  is  entitled  to  recover  from  his  principal  the  amount 
of  his  compensation,  including  disbursements  and  expenses  incurred 
in  the  sale,  care  and  preservation  of  the  property.  He  is  said  to 
have  a  lien  on  the  goods  or  proceeds  of  the  sale,  for  his  compensation. 
By  this  is  meant  that  he  has  a  right  to  retain  possession  of  the  goods 
until  his  compensation  is  paid,  or  in  the  case  of  sale,  to  deduct  his 
charges  from  the  proceeds  of  the  sale. 

When  authorized  to  sell  goods  on  credit,  in  case  payments  are 
not  made  when  due,  the  auctioneer  may  sue  in  his  own  name.  He 
may  also  sue  in  his  own  name  for  wrongful  acts  of  third  parties,  whereby 
the  goods  are  injured.  The  principal  also  may  bring  this  action  in 
his  own  name.  The  principal  is  liable  for  the  acts  of  his  auc- 
tioneer, committed  within  the  actual  or  apparent  scope  of  the  latter's 
authority. 

61.  Del  Credere  Agency.  An  agent  authorized  to  sell  is  not 
permitted  to  sell  on  credit,  unless  expressly  so  authorized  or  unless 
the  custom  or  usage  of  the  particular  kind  of  agency  impliedly  carries 
with  it  this  power. 

Some  agents  are,  by  their  contracts  of  agency,  authorized  to 
sell  on  credit,  on  condition  that  they  guarantee  to  save  their  princi- 
pals from  losses  resulting  therefrom.  Such  an  agency  is  called  a 
del  credere  commission,  and  the  agent  is  called  a  del  credere  agent. 
This  term  means  that  in  consideration  of  the  agreed  commission  or 
salary  paid  the  agent,  the  latter  agrees  to  pay  lo  the  principal,  when 
due,  the  sums  which  third  parties,  who  buy  the  principal's  goods  from 
the  agent,  fail  to  pay. 

This  agreement  to  indemnify  the  principal  against  losses  on 
credits  made  by  the  agent,  is  regarded  as  an  original  promise  on  the 
part  of  the  agent,  and  not  a  promise  to  pay  the  debt  of  another. 
By  reason  of  this  attitude  on  the  part  of  the  courts  in  interpreting 
this  contract  as  an  original  promise  on  the  part  of  the  del  credere  agent 


COMIMERCIAL  LAW  47 

to  pay  his  own  debt,  and  not  the  debt  of  another,  the  contract  does 
not  have  to  be  in  writing.  (See  Statute  of  Frauds.)  For  example, 
A,  a  manufacturer  of  farm  machinery,  employs  B  as  agent  to  sell  farm 
machinery  on  credit,  on  condition  that  B  personally  guarantees  the 
sales.  B  sells  a  mowing  machine  to  C,  to  be  paid  for  within  ninety 
days.  C  fails  to  make  payment.  A  may  sue  and  recover  the  amount 
of  the  purchase  price  from  B. 

62.  Real  Estate  Brokers.  A  real  estate  broker  is  one  em- 
ployed to  make  contracts  involving  the  sale  or  leasing  of  real  property. 
The  sale  of  lots,  of  houses  and  lots,  and  farms  are  common  examples. 

A  real  estate  broker  is  seldom  authorized  to  do  more  than  find 
a  purchaser  or  tenant,  not  being  authorized  to  make  the  lease  or  con- 
tract of  sale.  By  reason  of  this  limitation  generally  placed  on  a  real 
estate  broker's  authority,  many  disputes  arise  over  real  estate  brokers' 
rights  to  compensation.  A  principal  may  enter  into  any  kind  of 
contract  he  desires  with  a  real  estate  broker,  and  is  liable  when  the 
broker  has  performed  his  contract,  and  not  before.  The  difficulty 
is  in  determining  when  the  broker  has  substantially  performed  his 
contract.  If  A  hires  B  to  procure  a  purchaser  for  his  house  and 
lot,  and  agrees  to  pay  him  2%  of  the  selling  price  when  he  obtains 
the  signature  of  a  financially  responsible  purchaser  to  a  contract  of 
sale,  B  is  not  entitled  to  his  commission  until  he  obtains  such  a 
party's  signature  to  a  contract.  The  fact  that  A  has  entered  into 
this  contract  with  B,  does  not,  in  the  absence  of  an  express  stipulation 
to  the  contrary,  prevent  A  from  selling  the  property  himself,  or  from 
employing  as  many  other  brokers  as  he  pleases  to  attempt  to  make 
the  sale. 

Most  brokers,  however,  are  employed  on  certain  terms  to  obtain 
a  purchaser  or  tenant.  If  the  agent  succeeds  in  obtaining  such  a  pur- 
chaser or  tenant,  the  principal  must  pay  the  broker  the  agreed  com- 
pensation. The  owner  cannot  act  unfairly  by  the  broker.  If  the 
broker  obtains  a  tenant  or  purchaser  by  seeking  him  out,  and  by  in- 
teresting him  in  the  property,  the  owner  cannot  avoid  the  payment  of 
commission  by  discharging  the  broker  and  completing  the  deal  him- 
self. In  the  absence  of  an  express  agreement  to  give  the  broker  a 
certain  fixed  time  in  which  to  make  the  sale  or  find  a  tenant,  the 
owner  may  discharge  the  agent  at  any  time  he  sees  fit,  just  as  the 
agent  may  cease  his  efforts  at  any  time  he  chooses.     The  owner  can- 


48  COMMERCIAL  LAW 

not  discharge  the  agent  just  as  the  latter  is  completing  the  sale,  in 
order  to  take  advantage  of  the  agent's  efforts,  without  paying  him  the 
agreal  compensation.  The  agent,  in  this  event  is  held  substantially 
to  have  performed  his  contract.  Contracts  with  real  estate  brokers 
should  be  carefully  drawn,  and  should  contain  express  stipulations 
as  to  the  powers  and  limitation  of  the  broker's  authority.  The  temp- 
tation is  great  on  the  part  of  both  parties  to  claim  that  the  sale  was, 
or  was  not  made,  through  the  efforts  of  the  broker.  The  contract 
of  a  real  estate  broker  differs  not  at  all  from  any  other  contract. 
The  conditions  are  such,  however,  that  the  agreement  is  frequently 
indefinite,  and  it  is  difficult  to  determine  when  a  substantial 
performance  has  been  made. 

In  the  absence  of  any  agreed  compensation,  the  real  estate  broker 
is  entitled  to  receive  the  customary  fees.  In  the  absence  of  any  cus- 
tom regulating  the  commission,  he  is  entitled  to  receive  a  reasonable 
compensation. 

A  real  estate  broker  is  not  permitted  to  represent  both  parties, 
or  to  receive  compensation  from  both  parties.  If  a  broker  is  prom- 
ised compensation  from  the  purchaser  which  he  agrees  to  accept, 
without  the  consent  of  the  owner,  he  cannot  receive  compensation 
from  either  party. 

63.  Termination  of  Agency.  If  an  agent  performs  the  terms 
of  his  agency,  the  agency  is  said  to  be  terminated  by  performance. 
He  ceases  to  be  agent,  by  reason  of  having  performed  his  contract. 

If  an  agent  is  employed  to  act  as  agent  for  a  specified  time,  the 
lapse  of  the  stipulated  time,  of  itself,  terminates  the  agency. 

An  agency  is  a  contract,  express  or  implied,  and  it  may  be  ter- 
minated at  any  time  by  any  act  of  the  parties  thereto  showing  such 
to  be  their  intention.  There  is  one  exception  to  this  rule,  and  that 
is,  that  an  agency  coupled  with  an  interest  cannot  be  terminated  by 
an  act  of  one  of  the  parties.  This  exception  is  discussed  in  a  separate 
section. 

Where  an  agency  is  terminated  by  failure  or  refusal  of  the  prin- 
cipal, or  agent  to  carry  out  his  terms  of  the  contract,  the  defaulting 
party  is  liable  in  damages  to  the  other  party.  This  does  not  prevent 
the  termination  of  the  agency  however. 

Where  an  agency  is  terminated  by  the  failure  or  refusal  of  either 
party  to  observe  the  conditions  of  the  contract  of  agency,  the  agency 


COMMERCIAL  LAW  49 

still  subsists  on  the  part  of  third  persons,  who  have  dealt  with  the 
agent,  and  who  have  not  received  notice  of  the  termination.  Upon 
revoking  the  agent's  authority,  the  principal  must  notify  third  per- 
sons, who  have  dealt  with  the  agent,  or  who  have  knowledge  of  the 
agency  contract,  and  who  would  be  likely  to  continue  to  deal  with 
him  as  agent.  If  the  principal  does  not  give  third  parties  such  notice, 
he  Is  still  liable  to  them  on  contracts  subsequently  made  by  the  agent 
in  the  principal's  name.  For  example,  if  A,  a  wholesale  druggist, 
employs  B  to  sell  goods  for  one  year  and  C  knows  of  the  contract, 
and  at  the  expiration  of  six  months,  A  discharges  B  for  failure  to  give 
him  his  exclusive  time,  A  must  notify  C  of  B's  discharge,  else  B  can 
still  bind  A  by  making  contracts  with  C. 

64.  Revocation  of  Agency  by  Operation  of  Law.  When  one 
of  the  parties  to  an  agency  contract  dies,  becomes  insane  or  bank- 
rupt, the  agency  is  said  to  terminate  by  operation  of  law.  \Mien 
the  principal  dies,  the  agency  terminates.  Death  of  itself,  constitutes 
notice  to  third  persons  of  the  termination  of  the  agency.  This  is 
true  of  all  agencies  except  those  coupled  with  an  interest,  discussed 
in  another  section.  If  any  agent  and  a  third  person  innocently  make 
a  contract  in  the  name  of  the  principal  after  the  death  of  the  principal, 
and  without  notice  of  the  principal's  death,  the  contract  is  not  en- 
forceable against  the  principal's  estate.  Death  of  the  principal  re- 
vokes the  agency.     Death  of  the  agent  also  revokes  the  agency. 

Insanity  of  the  agent,  or  of  the  principal  terminates  an  agency 
not  coupled  with  an  interest.  It  is  regarded  the  same  as  death  of 
one  of  the  parties. 

An  agency  is  terminated  by  the  bankruptcy  of  either  principal 
or  agent.  Mere  insolvency  on  the  part  of  the  principal  or  agent  does 
Dot,  of  itself,  terminate  the  agency,  but  bankruptcy,  voluntary  or  in- 
voluntary, terminates  it,  and  is  of  itself,  notice  to  third  persons.  An 
innocent  third  person  who  has  parted  with  his  money  on  a  contract 
made  with  the  agent  after  the  agency  has  been  terminated  by  reason 
of  insanity,  or  bankruptcy  of  the  principal,  may  not  enforce  his  con- 
tract, but  may  recover  his  money.  Injury  or  disability  of  an  agent, 
rendering  it  impossible  for  him  to  carry  out  the  terms  of  the  agency, 
terminates  the  agency. 

65.  Agency  Coupled  with  an  Interest.  An  agency  coupled 
with  an  interest  cannot  be  terminated  by  attempted  revocation  of 


50  COMIVIERCIAL  LAW 

the  principal,  nor  is  it  terminated  by  death,  insanity  or  bankruptcy 
of  the  principal  or  agent. 

If  the  agent  has  an  interest  in  the  subject  of  the  agency  outside 
his  interest  in  his  compensation,  he  is  said  to  have  an  agency  coupled 
with  an  interest.  Such  an  agency  is  irrevocable.  A  pays  B  one 
thousand  dollars  ($1,000.00)  for  one  eighth  interest  in  a  patent,  and 
in  consideration  of  this  purchase  is  given  the  agency  to  sell  the  patented 
article  for  a  fixed  commission.  This  constitutes  an  agency  coupled 
with  an  interest,  and  is  not  revoked  by  an  attempted  revocation  of 
the  principal  or  by  the  principal's  death.  A  is  indebted  to  B,  his 
attorney,  for  one  hundred  dollars  ($100.00).  A  gives  B  a  note  for 
one  hundred  and  fifty  dollars  ($150.00)  to  collect,  agreeing  to  pay 
him  10%  of  the  amount  collected,  and  to  permit  him  to  deduct  the 
one  hundred  dollars  ($100.00)  indebtedness.  This  constitutes  an 
agency  coupled  with  an  interest,  and  cannot  be  revoked  by  A. 

To  constitute  an  agency  coupled  with  an  interest,  the  interest  must 
be  coupled  with  the  subject  matter  of  the  agency,  and  not  merely 
with  the  compensation  the  agent  is  to  receive.  For  example,  if  A 
sends  his  attorney,  B,  a  note  to  collect,  agreeing  to  give  B  25%  of  the 
amount  collected,  this  does  not  constitute  an  agency  coupled  with  an 
interest,  and  may  be  revoked  at  any  time  by  A. 


QUIZ  QUESTIONS 

LAW  IN  GENERAL 

1.  How  many  classes  of  rights  are  there? 

2.  Name  them. 

3o     How  did  men  derive  these  rights? 

4.  What  limitations,  if  any,  are  there  to  rights? 

5.  Have  property  rights  always  been  recognized? 

6.  A  finds  a  watch  in  the  street  and,  without  making  any 
attempt  to  find  the  owner,  keeps  it.     Is  the  right  of  possession  in  Af 

7.  In  primitive  times  were  personal  or  property  rights  more 
generally  recognized? 


COMMERCIAL  LAW  51 

8.  How  were  rights  originally  enforced? 

9t  How  are  rights  enforced  at  present? 

10.  How  did  laws  originate? 

11.  Define  law. 

12.  WTiat  does  law  embrace? 

13.  ^Vhat  connection  have  laws  with  courts  of  justice? 

14.  What  connection,  if  any,  have  customs  to  laws? 

15.  WTiat  is  the  purpose  of  law? 

16.  WTiat  class  of  laws  is  enforced  for  the  benefit  of  the  state? 

17.  A  steals  B's  horse.  B,  by  proper  legal  action,  recovers 
possession  of  the  horse.  Is  the  law  enabling  B  to  recover  the  horse 
a  law  for  protection  of  citizens,  or  for  the  protection  of  property? 

18.  \Miat  are  the  sources  of  law? 

19.  Do  decisions  of  courts  form  any  part  of  law?    If  so,  what? 

20.  What  are  the  New  York  State  Reports? 

21.  What  are  the  Philippine  Island  Reports? 

22.  Is  the  treaty  existing  between  the  United  States  and  Japan, 
law?    If  so  what  kind  of  law? 

23.  Define  statutes.     How  are  statutes  enacted? 

24.  To  what  classification  of  law  do  statutes  belong? 

25.  Is  the  English  Constitution  written  or  unwritten  law? 

26.  Do  customs  and  statutes  bear  any  relation  to  each  other? 

27.  How  is  the  record  of  the  state  statutes  kept? 

28.  What  are  the  general  divisions  of  law? 

29.  Is  any  part  of  the  unwritten  law  written? 

30.  Is  all  unwritten  law  written? 

31.  Is  any  written  law  unwritten? 

32.  Is  unwritten  law  stable? 

33.  How,  if  at  all,  can  the  written  law  of  a  state  or  country  be 
changed? 

34.  Are  treaties  unwritten  law?  How,  if  at  all,  are  the  records 
of  Congress  kept? 

35.  Give  a  general  classification  of  law. 

36.  Is  there  a  universally  recognized  classification  of  law? 

37.  Define  adminstr alive  law  and  give  an  example. 

38.  Define  'public  law  and  give  an  example. 

39.  Define  private  law.    Classify  private  law. 

40.  Define  constitutional  law. 


52  COMMERCIAL  LAW 

41.  Define  criminal  law  and  give  an  example. 

42.  Can  the  heir  or  personal  representative  of  a  murdered  man 
ever  recover  money  compensation  for  the  murder? 

43.  If  so,  is  it  by  means  of  private  or  public  law? 

44.  Is  a  criminal  tried  and  punished  by  private  or  by  public 
law? 

45.  Define  law  of  procedure  and  give  an  example. 

46.  What  do  contracts  embrace? 

47.  WTiat  does  the  word  tort  mean? 

48.  Give  an  example  of  a  tort. 

49.  Does  the  same  act  ever  constitute  a  breach  of  contract, 
a  tort,  and  a  crime? 

50.  Define  commercial  law. 

CONTRACTS 

1.  Define  contract. 

2.  Give  an  example  of  a  business  transaction  which  constitutes 
a  contract. 

3.  What  is  the  purpose  of  putting  important  contracts  in 
writing? 

4.  What  is  meant  by  offerf 

5.  Give  an  example  of  offer. 

6.  A  coat  njiarked  $25  is  placed  by  a  merchant  in  a  window. 
Does  this  constitute  an  offer? 

7.  An  advertisement  is  put  in  a  paper  advertising  chairs  for 
$7.00  each.     Does  this  constitute  an  offer? 

8.  WTiat  is  an  agreement  f 

9.  Is  an  agreement  a  contract? 

10.  Give  an  example  of  ,an  agreement. 

11.  What  is  meant  by  aeceptaticef 

12.  Give  an  example  of  a  contract  having  no  acceptance. 

13.  A  offers  to  sell  B  his  watch  for  $10.00.     B  offers  A  S8.00. 
Is  there  an  acceptance?    Is  there  a  contract  in  the  above  case? 

14.  WTiat  is  a  counter  of  erf      Give  an  example  of  a  counter 
offer. 

15.  WHiat  is  meant  by  the  term  meeting  of  the  minds  f 

16.  Give  an  example  of  an  acceptance  not  of  the  exact  terms 
of  the  offer. 


COMMERCIAL  LAW  53 

17.  What  is  meant  by  mutualityf 

18.  Distinguish  meeting  of  the  minds  and  mutuality. 

19.  May  there  be  an  acceptance  of  a  contract  by  an  act?  If 
the  above  question  is  answered  in  the  affirmative,  give  an  example. 

20.  Must  an  acceptance  be  communicated  to  the  offer? 

21.  A  -^T-ites  B,  "I  will  sell  you  my  horse  for  SloO.  If  I  do  not 
hear  from  you  to  the  contrary  by  Thursday  noon  I  will  consider  the 
horse  yours,"  B  does  not  reply.  After  Thursday  noon,  to  whom 
does  the  horse  belong? 

22.  Define  option.     Give  an  example  of  an  option. 

23.  Does  an  option  require  a  consideration  to  render  it  valid? 

24.  WTiat  is  an  element   of  a  contract? 

25.  Give  the  elements  of  a  contract. 

26.  How  many  parties  to  every  contract? 

27.  WTiat  is  meant  by  legal  age? 

28.  A,  a  male,  sixteen  years  old,  contracts  with  B,  a  female, 
eighteen  years  old.  Can  B  avoid  the  contract  on  the  ground  of  the 
infancy  of  Af 

29.  Is  fraud  or  duress  a  defense  to  a  contract? 

30.  How  many  kinds  of  consideration  are  there? 

31.  Is  a  good  consideration  sufficient  to  support  a  contract? 

32.  Define  valuable  consideration. 

33.  Give  an  example  of  a  contract  which  may  be  supported 
by  a  good  consideration. 

34.  WTiat  is  meant  by  a  sealed  instrument? 

35.  Is  something  beneficial  to  the  promisee  a  sufficient  con- 
sideration to  a  contract? 

36  A  promises  B  to  pay  him  $100  if  B  will  promise  to  work 
for  him  for  one  month.  B  promises.  Is  there  a  consideration  to 
this  contract?     If  so,  what  is  it? 

37.  Define  mutual  promise. 

38.  Is  a  mutual  promise  a  valuable  consideration?  Give  an 
example  of  mutual  promise. 

39.  Define  past  consideration.  Give  an  example  of  past  con- 
sideration. 

40.  Does  a  past  consideration  support  a  contract? 

41.  WTiat  is  meant  by  adequate  consideration? 


54  COMMERCIAL  LAW 

42.  Does  a  consideration  have  to  be  adequate  to  support  a 
contract? 

43.  May  adequacy  of  consideration  be  considered  in  deter- 
mining whether  or  not  fraud  was  used  in  procuring  a  contract? 

44.  Give  an  example  of  a  promise  to  do  something  one  is  already 
bound  to  do. 

45.  Is  a  promise  to  do  something  one  is  already  bound  to  do  a 
sufficient  consideration  to  support  a  contract? 

46.  Give  an  example  of  illegal  consideration. 

47.  Does  an  illegal  consideration  support  a  contract? 

48.  Do  all  the  terms  of  a  contract  have  to  be  express? 

49.  Define  express  contract. 

50.  A  housewife  orders  a  sack  of  flour  from  her  grocer  by 
tel  phone.  The  flour  is  delivered  and  accepted  by  her.  Is  this  an 
implied  contract? 

5L     Give  an  example  of  an  express  contract. 

52.  Do  any  contracts  have  every  term  expressly  set  forth? 

53.  Define  implied  contrcict. 

54.  Are  uncertain  contracts  void  or  voidable?  Give  an  ex- 
ample of  an  uncertain  contract. 

55.  Give  the  distinction  between  unilateral  and  bilateral  con- 
tracts. 

56.  A  promises  to  sell  his  dog  to  jB  if  5  will  promise  to  pay  him 
$5.00  the  following  day.  B  promises  to  pay  A  $5.00  the  following 
day.     Is  this  contract  unilateral  or  bilateral? 

57.  A  promises  to  pay  B  $100  if  B  will  dig  a  well  for  A.  B 
digs  the  well.     Is  the  contract  unilateral  or  bilateral? 

58.  Distinguish  executory  and  executed  contracts. 

59.  A  promises  to  pay  B  $5,000  if  B  will  deliver  to  him  a  deed 
of  his  farm.  B  delivers  the  deed.  Is  the  contract  executed  or 
executory? 

60.  Is  the  above  contract  executed  as  to  A?  Is  it  executory 
as  io  Bf 

6L     Are  infants  bound  by  their  contracts?     Define  infant. 

62.  Are  infants'  contracts  void? 

63.  Distinguish  void  and  voidable. 

64.  Can  a  competent  party  contracting  with  an  infant  avoid 
the  contract  on  the  ground  of  infancy  of  the  other  party? 


COMMERCIAL  LAW  55 

05.     Can  an  infant  ratify  a  contract  after  becoming  of  legal  age? 
GG.     Explain  how,  if  at  all,  an  infant  may  ratify  his  contracts. 

67.  Define  the  term  necessaries. 

68.  A,  an  infant,  has  not  sufficient  clothing.  B,  a  merchant, 
sells  him  a  coat  worth  $7.00,  for  $14.00.  Can  B  recover  anything 
from  A?    If  so,  how  much? 

69.  Is  an  infant  entitled  to  receive  his  wages? 

70.  \Miat  is  meant  by  emancipation  of  an  infant?  Is  emancipa- 
tion of  an  infant  ever  implied? 

71.  Wliat  is  meant  by  novation?     Give  an  example  of  novation. 

72.  Are  contracts  made  for  the  benefit  of  a  third  person  enforce- 
able by  such  third  person? 

73.  Are  contracts  of  an  insane  person  enforceable? 

74.  Are  contracts  of  insane  persons,  intoxicated  persons,  and 
idiots  void  or  voidable? 

75.  A,  while  intoxicated,  purchased  a  coat  from  B  for  $10.00. 
The  following  day,  when  sober,  A  promises  to  pay  for  the  coat. 
Can  B  enforce  the  contract? 

7G.  Can  an  insane  person  make  a  valid  contract  during  a  lucid 
interval  ? 

77.  Can  married  women  enter  into  contracts? 

78.  Do  custom  and  usage  ever  enter  into  a  contract? 

79.  A  purchases  forty  barrels  of  yellow  grease  from  B,  like 
sample  furnished.  The  grease  arrives,  ranging  in  color  from  white 
to  black.  B  offers  to  show  a  custom  among  grease  dealers,  known 
to  A,  that  a  composite  sample  is  used  in  selling  grease.  Can  he  show 
this  custom  as  part  of  the  contract? 

80.  Are  oral  contracts  ever  valid?  Why,  if  at  all,  do  some  con- 
tracts have  to  be  in  writing? 

81.  What  is  meant  by  the  statute  of  frauds? 

82.  WTien  and  where  did  this  statute  originate?  What  was 
the  purpose  of  this  statute? 

83.  Does  the  statute  serve  any  useful  purpose  at  the  present 
time? 

84.  Do  the  states  of  this  country  have  a  statute  of  frauds,  or 
is  it  a  part  of  their  unwritten  law? 

85.  By  the  terms  of  the  statute  of  frauds  what  contracts  must 
be  in  writing? 


56  COMMERCIAL  LAW 

86.  Are  contracts  covered  by  the  Statute  of  Frauds  illegal  if 
not  in  writing? 

87.  A  orally  promises  B  to  work  for  him  for  two  years  for  the 
consideration  of  $2,000.     Can  either  party  enforce  the  contract? 

88.  What  is  meant  by  the  term  specialty?  Are  specialties 
included  in  the  Statute  of  Frauds? 

89.  Can  you  make  an  oral  promissory  note? 

90.  Can  contracts  be  made  by  letter  and  telegraph? 

9L  A,  by  letter,  offers  B  $1,000  for  B's  team  of  horses.  B 
mails  a  letter  of  acceptance  which  is  lost  in  the  mails.  Is  there  a 
valid  contract? 

92.  A,  by  letter,  offers  B  $10  for  a  harness.  By  the  follow- 
ing mail,  A  writes  revoking  the  offer.  B  receives  the  letter  of  revoca- 
tion five  minutes  after  mailing  his  acceptance.  Is  the  contract 
revoked? 

93.  A,  by  letter,  offers  B  $1,000  for  his  racing  horse  and  says, 
"I  will  consider  my  offer  accepted  upon  receipt  of  your  reply."  B's 
letter  of  acceptance  is  lost  in  the  mail.     Is  there  a  valid  contract? 

94.  A  wires  B  that  he  will  pay  him  $100  per  share  for  his  Penn- 
sylvania Railroad  stock.  B  hands  his  telegram  of  acceptance  to 
the  telegraph  operator  who  fails  to  send  it.  The  following  day  A 
wires  a  revocation  of  his  offer.     Is  there  a  valid  contract? 

95.  Does  a  revocation  by  wire  or  letter  have  to  be  received  to 
be  effected? 

96.  Does  an  acceptance  by  wire  or  letter  have  to  be  received 
by  the  offerer  to  constitute  a  valid  acceptance? 

97.  In  what  respect  do  sealed  instruments  differ  from  ordinary 
contracts? 

98.  At  present  what  constitutes  a  seal? 

99.  At  present  is  it  the  tendency  of  the  law  to  favor  sealed 
instruments? 

100.  Are  Sunday  contracts  void  or  voidable? 

101.  WTiat  makes  Sunday  contracts  unenforceable? 

102.  WTiat  was  The  Lord's  Day  Act  of  England? 

103.  W^at  is  meant  by  works  of  charity  and  necessity? 

104.  A  makes  and  delivers  a  promissory  note  to  B  for  SI 00  on 
Sunday  Is  the  note  enforceable? 


COMMERCIAL  LAW  57 

105.  ^Vllat  makes  a  contract  illegal? 

106.  Are  illegal  contracts  void  or  voidable?  Give  an  example 
of  an  illegal  contract? 

107.  What  is  a  gambling  contract? 

108.  Are  gambling  contracts  void? 

109.  Why  are  gambling  contracts  illegal? 

110.  De^ne  fraud. 

111.  Is  a  false  representation  made  during  the  formation  of  a 
contract  known  by  both  parties  to  be  false,  a  defense  to  the  contract? 

112.  Give  an  example  of  a  false  misrepresentation  which  will 
serve  to  avoid  a  contract? 

113.  Can  there  be  duress  without  personal  violence?  Define 
duress. 

114.  Give  an  example  of  duress. 

115.  Do  duress  and  fraud  render  a  contract  void  or  voidable? 

116.  Define  mistake  in  connection  with  making  a  contract. 
Define  mistake  of  fact. 

117.  De^ne  mistake  of  law. 

118.  Does  mistake  of  one  party  to  a  contract  avoid  the  contract? 

119.  Does  mistake  of  law  avoid  a  contract? 

120.  Does  mutual  mistake  render  a  contract  void  or  voidable? 

121.  What  is  meant  by  a  contract  impossible  of  performancef 
Give  an  example  of  a  contract  impossible  of  performance. 

122.  A,  on  April  4,  enters  into  a  contract  dated  April  2,  by 
which  he  promises  to  deliver  to  B  within  twenty-four  hours,  five  tons 
of  coal.     Is  A  liable  on  this  contract? 

123.  Do  floods,  earthquakes,  or  lightning  preventing  perform- 
ance excuse  performance? 

124.  Is  a  party  to  a  contract  excused  from  performance  by 
reason  of  a  strike? 

125.  May  a  party  to  a  contract  stipulate  against  strikes  and 
Acts  of  God  in  such  a  manner  as  to  avoid  liability  therefor? 

126.  If  a  party  to  a  contract  renders  performance  impossible 
can  he  force  performance? 

127.  WTiat  is  meant  by  conflict  of  law? 

128.  Does  the  law  of  the  place  where  a  contract  is  made,  or 
the  law  of  the  place  where  the  contract  is  enforced,  prevail? 


58  COMMERCIAL  LAW 

129.  If  a  contract  is  made  in  one  place,  to  be  performed  in 
another,  the  law  of  which  place  prevails  in  the  interpretation  of  the 
contract? 

130.  What  is  meant  by  assignment  of  a  contract? 

131.  A,  a  singer,  contracts  to  sing  at  B's  opera  house  for  one 
week.  Can  A  assign  her  contract  to  C,  another  singer?  Can  B 
assign  his  contract  to  Df 

132.  What  is  meant  by  giving  notice  cf  assignment? 

133.  Is  an  assignment  a  contract? 

134.  What  are  the  elements  of  a  valid  assignment? 

135.  Does  an  assignment  require  a  consideration? 

136.  Write  an  assignment  of  a  simple  contract. 

137.  Define  several  liability. 

138.  Can  a  party  be  jointly  and  severally  liable  on  the  same 
contract? 

139.  If  two  parties  are  jointly  liable  on  a  contract  can  one  of 
them  be  sued  thereon  without  the  other? 

140.  If  two  parties  are  severally  liable  on  the  same  contract, 
can  both  be  sued  together  thereon? 

141.  Define  liability  in  solido.  Give  an  example  of  liability 
in  solido. 

142.  How  may  a  contract  be  discharged  by  performance? 
Give  an  example  of  a  contract  discharged  by  performance. 

143.  What  is  meant  by  tender?    WTiat  constitutes  legal  tender? 

144.  Does  United  States  statute  or  a  state  statute  make  certain 
money  legal  tender? 

145.  WTiat  kinds  of  money  constitute  legal  tender? 

146.  A  owes  B  $5.00.  He  tenders  him  the  amount  in  nickels. 
Is  the  tender  good? 

147.  A  owes  B  $500.00.  He  tenders  him  a  certified  check  for 
the  amount.     Is  the  tender  good? 

148.  Can  a  contract  be  discharged  by  a  subsequent  agreement? 

149.  A  agrees  to  dig  a  well  for  B  for  $10.00.  Before  A  starts 
work,  B  changes  his  mind,  and  offers  A  $1.00  in  settlement.  Is 
the  contract  discharged  if  A  accepts  the  $1.00  ? 

150.  Define  warranty. 

151.  Give  an  example  of  warranty  to  a  contract. 


COMMERCIAL  LAW  59 

152.  Does  breach  of  warranty  discharge  the  contract? 

153.  Does  breach  of  warranty  give  rise  to  an  action  for 
damages? 

154.  Define  rescission. 

155.  Give  an  example  of  rescission. 

156.  Define  statu  quo. 

157.  Define  breach  of  contract. 

158.  Give  an  example  of  breach  of  contract. 

159.  In  case  of  breach  of  contract  must  the  other  party  wait 
until  the  time  for  performing  the  entire  contract  elapses,  or  may  he 
sue  at  once? 

160.  Define  bankruptcy. 

161.  By  what  kind  of  law  is  bankruptcy  regulated? 

162.  Does  bankruptcy  discharge  a  contract? 

163.  Define  voluntary  bankruptcy. 

164.  WTio  may  become  a  voluntary  bankrupt? 

165.  Define  involuntary  bankruptcy.  WTio  may  become  an 
involuntary  bankrupt? 

166.  Define  act  of  bankruptcy. 

167.  Enumerate  acts  of  bankruptcy. 

168.  At  common  law  could  one  party  to  a  contract  compel 
another  to  perform  it  specifically?  Under  present  law  can  a  contract 
for  sale  of  personal  property  be  enforced  specifically? 

169.  What  is  the  measure  of  damages  for  failure  to  deliver 
merchandise  under  a  contract  of  sale? 

170.  How  did  the  court  of  equity  originate? 

171.  Are  juries  used  in  courts  of  equity? 

172.  What  classes  of  cases  are  tried  in  equity? 

173.  Does  a  court  of  equity  have  jurisdiction  of  a  case  where 
there  is  a  plain  and  adequate  remedy  at  law? 

174.  With  what  kind  of  contracts  is  equity  especially  concerned? 

175.  Give  an  example  of  a  contract  which  may  be  enforced 
specifically  by  a  court  of  equity. 

176.  Write  a  form  for  a  simple  contract  between  A  and  B  for 
the  sale  of  a  horse. 


60  COMMERCIAL  LAW 

PRINCIPAL  AND  AGENT 

1.  What  is  meant  by  the  term  agency? 

2.  Give  an  example  of  a  transaction  completed  by  an  agent. 

3.  Is  there  a  limitation  upon  the  kinds  of  business  which 
may  be  transacted  by  an  agent? 

4.  Distinguish  principal  and  agent  from  master  and  servant. 

5.  Define  and  give  an  example  of  principal. 

6.  Define  and  give  an  example  of  agent. 

7.  Define  and  give  an  example  of  agency. 

8.  Define  infant. 

9.  Is  a  married  woman  seventeen  years  of  age  an  infant? 
10.     May  an  infant  be  a  principal? 

IL     Define  and  distinguish  void  and  voidable  contracts. 

12.  May  an  idiot^  insane,  or  drunken  person  act  as  principal? 

13.  May  a  corporation  or  partnership  transact  business  through 
agents? 

14.  May  a  child  eight  years  of  age  act  as  agent? 

15.  In  general,  what  persons  may  act  as  agents? 

16.  May  a  person  act  as  agent  who  is  not  capable  of  acting  for 
himself? 

17.  May  a  person  whose  interests  are  opposed  to  those  of  his 
principal  act  as  agent? 

18.  May  corporations  or  partnerships  serve  as  agents? 

19.  Must  an  agent's  authority  to  act  as  agent  be  in  writing? 

20.  May  an  agent  be  appointed  or  authorized  to  act  by  implied 
contract? 

21.  Define  and  give  an  example  of  implied  contract. 

22.  What  is  meant  by  ratifying  an  act  of  an  agent 

23.  Give  an  example  of  a  principal's  ratification  o\  an  unauthor- 
ized act  of  an  agent. 

24.  Give  an  example  of  a  contract  of  agency  which  must  be  in 
writing. 

25.  \Miy  must  some  contracts  be  in  writing? 

26.  What  are  the  principal  provisions  of  the  Statute  of  Frauds? 

27.  Must  contracts  of  agency  authorizing  an  agent  to  complete 
a  land  transfer  be  in  writing? 

28.  Must  a  contract  authorizing  an  agent  to  procure  a  pur- 
chaser for  a  house  and  lot  be  in  writing? 


COMMERCIAL  LAW  61 

29.  Can  a  third  party  rely  upon  the  statements  of  an  agent 
that  he  has  authority  to  act  as  agent? 

30.  May  a  person  do  through   an   agent   anything  which  he 
may  lawfully  do  by  himself? 

3L     A  employs  B  to  purchase  votes  for  an  act  pending  in  a 
state  legislature.     Is  A  or  B,  or  both,  guilty  of  a  crime? 

32.  A  employs  B  to  paint  a  picture,  and  B  employs  C  to  paint 
the  picture.     INIust  A  accept  the  work  of  Cf 

33.  What  things  are  necessary  to  enable  a  person  to  ratify  the 
acts  of  an  alleged  agent? 

34.  May  a  forgery  be  ratified  ? 

35.  Give  a  classification  of  agents. 

36.  A  is  employed  to  deliver  a  package  for  B.  \Miat  kind  of 
an  agent  is  Bf 

37.  Give  an  example  of  a  universal  agent. 

38.  Enumerate  the  duties  a  principal  owes  his  agent. 

39.  A  employs  B  to  work  in  his  garden.  B  works  for  ten  days, 
no  compensation  having  been  agreed  upon.  How  much,  if  anything, 
can  B  recover  from  A? 

40.  If  an  agent  abandons  his  agency  before  the  time  of  his 
agency  expires,  can  he  recover  anything  for  work  performed?  If  so, 
how  much? 

4L  What  duty,  if  any,  does  a  principal  owe  to  his  servant  as 
to  furnishing  a  safe  place  in  which  to  work? 

42.  What  rules,  if  any,  does  a  servant  assume? 

43.  In  general,  what  are  the  liabilities  of  a  principal  to  third 
persons  who  deal  with  an  agent? 

44.  Is  a  principal  liable  to  a  third  person  who  has  dealt  with 
an  agent,  who  acted  within  the  apparent  but  not  the  actual  scope  of 
his  authority? 

45.  Is  a  principal  liable  to  third  persons  for  lots  committed 
by  an  agent  within  the  scope  of  the  agent's  authority? 

46.  Give  an  example  of  a  lot  or  private  wrong  committed  by 
an  agent  while  acting  for  his  principal,  for  which  the  principal  is  not 
liable. 

47.  Enumerate,  in  general,  the  duties  an  agent  owes  his  principal. 

48.  Is  an  agent  liable  to  his  principal  for  mistakes  of  judgment 
or  discretion? 


62  COMMERCIAL  LAW 

49.  Is  an  agent  who  acts  without  compensation  ever  liable  to 
his  principal  for  negligence?    If  so,  give  an  example. 

50.  Enumerate,  in  general,  the  liabilities  of  an  agent  to  third 
persons  with  whom  he  deals. 

5L  A,  an  agent  for  B,  sells  goods  to  C,  in  his  own  name.  C 
afterwards  discovers  that  A  is  agent  for  B.     Can  C  hold  A? 

52.  If  an  agent  procures  a  contract  for  his  principal  by  means 
of  fraud  is  the  agent  liable  personally  on  this  contract? 

53.  If  an  agent,  believing  he  has  authority  to  act  as  an  agent, 
where  in  fact  he  does  not,  reveals  all  the  facts  of  his  agency  to  a  third 
party  with  whom  he  is  dealing,  is  he  liable  personally  to  such  third 
party  if  it  turns  out  that  he  acted  without  authority? 

54.  Define  and  give  an  example  of  undisclosed  principal. 

55.  Is  an  undisclosed  principal  when  discovered,  liable  for  the 
acts  of  his  agent? 

56.  Is  an  agent  of  an  undisclosed  principal  personally  liable 
to  third  persons  for  acts  of  agency  after  the  undisclosed  principal  is 
discovered? 

57.  May  there  be  an  undisclosed  principal  to  a  negotiable 
instrument? 

58.  What  is  meant  by  apparent  authority  of  an  agent  as  dis- 
tinguished from  actual  autkorityf 

59.  Give  an  example  of  an  agency  where  the  apparent  authority 
of  the  agent  conflicts  with  the  actual  authority. 

60.  If  an  agent  appears  to  have  authority  to  act  for  another, 
but  in  fact  never  received  any  authority,  can  third  persons  rely  upon 
his  apparent  authority? 

61.  Do  customary  powers  belonging  to  an  agent  come  within 
the  meaning  of  apparent  authority? 

62.  May  a  principal  limit  an  agent's  apparent  authority  by 
printing  limitations  in  the  agent's  order  sheet  and  in  making  contracts 
with  third  persons?     If  so,  give  an  example. 

63.  Define  and  give  an  example  of  secret  instructions. 

64.  Can  a  principal  evade  responsibility  to  third  persons  by 
secret  instructions  given  to  an  agent? 

65.  If  a  third  party  dealing  with  an  agent  knows  of  the  secret 
instructions,  is  he  bound  by  them? 

66.  Define  and  give  an  example  of  sub-agent. 


COMMERCIAL  LAW  63 

67.  Is  a  sub-agent  responsible  to  the  agent? 

68.  Is  an  agent  ever  responsible  for  the  acts  of  a  sub-agent? 

69.  What  matters,  if  any,  may  an  agent  delegate? 

70.  Define  and  give  examples  of  mechanical  and  ministerial 
duties. 

71.  Distinguish  an  agency  requiring  personal  skill,  discretion, 
and  judgment,  from  one  requiring  the  performance  of  ministerial  or 
mechanical  duties. 

72.  When,  if  at  all,  is  an  agent  authorized  to  collect? 

73.  Is  an  agent  authorized  to  sell  goods,  always  authorized  to 
collect  for  them  ? 

74.  Is  an  agent  authorized  to  collect,  authorized  to  take  checks? 

75.  How  should  an  agent  authorized  to  sign  a  written  instru- 
ment for  his  principal,  sign? 

76.  May  an  agent  authorized  to  sign  a  promissory  note  for  his 
principal,  sign  his  principal's  name  without  his  own? 

77.  An  agent  authorized  to  sign  a  written  contract  for  his  prin- 
cipal signs  his  own  name  followed  by  the  word,  agent;  e.  g.,  "A,  Agent." 
Is  the  principal  bound? 

78.  When,  if  at  all,  is  an  agent  authorized  to  warrant  the  quality 
of  personal  property  sold? 

79.  Define  warranty. 

80.  Give  an  example  of  an  agent  who  is  impliedly  authorized 
to  warrant. 

81.  Do  usage  and  custom  have  anything  to  do  with  the  agent's 
implied  authority  to  warrant? 

82.  Define  factor,  and  give  an  example. 

83.  Do  factors  have  possession  of  the  goods? 

84.  Do  factors  have  implied  authority  to  collect? 

85.  Do  factors  have  the  right  to  sell  goods  in  their  own  name? 

86.  Is  a  commission  merchant  a  factor? 

87.  Define  broker. 

88.  Distinguish  broker  and  factor. 

89.  Give  an  example  of  broker 

90.  Is  a  real  estate  agent  a  broker,  or  a  factor? 

91.  In  what  respect,  if  any,  does  an  auctioneer  differ  from  an 
ordinary  agent? 


64  COMMERCIAL  LAW 

92.  What  is  meant  by  licensed  auctioneers? 

93.  Are  auctioneers'  fees  ever  regulated  by  statute? 

94.  What  is  meant  by  auctioneer's  lienf 

95.  When,  if  at  all,  may  an  auctioneer  sell  on  credit? 

96.  May  an  auctioneer  make  his  own  terms  of  sale?  Are  all 
third  persons  bound  by  the  terms  advertised? 

97.  Define  and  give  an  example  of  del  credere  agent. 

98.  Must  a  del  credere  agent  receive  a  separate  consideration 
for  his  guaranty? 

99.  When  is  a  real  estate  agent  entitled  to  receive  his  com- 
mission? 

100.  Does  the  contract  of  a  real  estate  broker  differ  from  the 
contract  of  any  other  agent? 

lOL     How  may  an  agency  be  terminated? 

102.  Give  an  example  of  an  agency  terminated  by  lapse  of  time, 
and  of  one  terminated  by  act  of  parties. 

103.  May  all  agencies  be  terminated  at  the  will  of  the  parties? 

104.  WTiat  is  meant  by  notice  to  third  'persons  of  termination  of 
an  agency,  and  when,  if  at  all,  is  this  notice  necessary? 

105.  Explain  termination  of  agency  by  operation  of  law. 

106.  In  case  of  termination  of  agency  by  death  of  principal 
must  third  parties  be  notified? 

107.  Does  injury  or  liability  of  an  agent  ever  terminate  an 
agency?    If  so,  under  what  circumstances? 

108.  Define  agency  coupled  with  an  interest. 

109.  Is  an  agency  coupled  with  an  interest  revocable  at  the  will 
of  either  party? 

110.  A  employs  an  agent  at  a  salary  of  one  hundred  dollars  per 
month,  promising  him  1%  commission  in  addition,  on  all  orders 
taken  in  excess  of  $1,000  per  week.  Is  this  an  agency  coupled  with 
an  interest? 

111.  Give  an  example  of  an  agency  coupled  with  an  interest. 


COMMERCIAL  LAW 

PART  II 


PARTNERSHIP 

66.  In  General.  A  party  may  trade  and  enter  into  contracts 
by  himself,  or  he  may  associate  with  himself  others.  A  person  is  not 
obliged  by  law  to  transact  business  solely  by  himself.  He  is  per- 
mitted, for  the  purpose  of  having  labor,  capital  and  skill  joined  in  one 
enterprise,  to  combine  with  others.  Where  a  person  joins  with  him- 
self one  or  more  persons  for  the  purpose  of  transacting  business  as 
a  unit,  the  firm  composed  of  the  two  or  more  persons  thus  joined  is 
called  a  partnership. 

A  partnership  may  be  defined  to  be  a  contract  between  two  or 
more  persons,  by  which  their  labor,  skill  or  property  is  joined  in 
an  enterprise  for  common  profit,  and  in  which  each  partner  may  act  as 
principal.  The  principal  features  of  a  partnership  are,  the  right  of 
each  partner  to  act  as  principal  for  the  other  partner,  and  the  indi- 
vidual liability  of  each  partner  for  the  acts  of  the  partnership.  A 
and  B  agree  to  combine  their  efforts  in  operating  a  tea  and  coffee 
store.  Each  may  bind  the  other  by  contract,  made  within  the  scope 
of  the  business,  and  each  is  liable  individually  to  pay  the  debts  in- 
curred by  the  partnership. 

67.  How  a  Partnership  is  Created.  A  partnership  is  created 
by  a  contract.  This  contract  may  be  oral,  express  or  implied.  Many 
partnerships  are  created  by  carefully  drawn,  written  instruments,  in 
which  the  rights  and  duties  of  each  party  are  set  forth  in  detail; 
while  others  are  made  by  oral  agreement.  Any  contract  of  impor- 
tance should,  for  the  purpose  of  having  a  record  of  the  exact  under- 
standing of  the  parties,  be  made  in  writing.  As  between  themselves, 
parties  cannot  be  partners  except  such  was  their  intention.  Some- 
times, parties  are  considered  partners  as  to  third  persons,  with  whom 
they  deal,  and  are  liable  as  partners,  where  there  is  no  intent  to  form 
a  partnership,  and  when  none  exists  as  between  themselves.  This 
relationship,  called  partnership  hij   estoppel,  is  based  on  equitable 


66  COMMERCIAL  LAW 

reasons  and  is  discussed  more  at  length  under  a  separate  section. 
As  between  the  partners  themselves,  to  constitute  a  partnership,  there 
must  be  a  contract  to  that  effect.  This  requires  an  assent  on  the  part 
of  all  the  parties,  based  upon  a  valid  consideration.  Parties  may 
enter  into  an  agreement  to  enter  into  a  partnership  at  a  future  time. 
In  this  event,  the  partnership  does  not  exist  as  such  until  the  time 
provided  for  in  the  contract  arrives,  and  until  the  conditions  of  the 
executory  agreement  have  been  complied  with. 

A  partnership  may  be  created  for  any  lawful  purpose.  If  the 
partnership  contract  is  procured  through  fraud  or  misrepresentation, 
it  may  be  avoided  by  reason  thereof. 

68.  Who  May  be  Partners.  Any  person  competent  to  con- 
tract on  his  own  behalf  may  enter  into  a  contract.  (See  "Competency 
of  Parties,"  chapter  on  Contracts.)  An  infant,  or  person  under 
legal  age,  may  enter  into  a  partnership  contract  the  same  as  he  may 
enter  into  any  other  contract.  The  law  does  not  prohibit  it.  But 
contracts  by  infants  are  voidable.  They  may  be  renounced  by  the 
infant  at  his  pleasure.  For  example,  if  ^,  of  legal  age,  enters  into  a 
partnership  contract  with  B,  seventeen  years  of  age,  B  may  renounce 
his  obligation  to  A  at  any  time  he  pleases,  before  he  has  reached  legal 
age.  A,  however,  cannot  renounce  his  partnership  contract  on  accoun  t 
of  the  infancy  of  B.  B  may  ratify  his  contract  after  becoming  of 
legal  age.  If  B,  after  becoming  of  legal  age,  refuses  to  continue  the 
partnership,  and  refuses  to  carry  out  his  partnership  agreement,  he 
is  deemed  in  law  to  have  renounced  his  partnership,  and  is  not  liable 
for  the  obligation  of  the  partnership.  If,  however,  after  reaching 
legal  age,  B  continues  the  partnership  relationship  for  an  appreciable 
length  of  time,  he  is  deemed  in  law  to  have  ratified  the  agreement, 
and  is  thereafter  liable  thereon.  B  may  not  only  renounce  the  partner- 
ship agreement  as  to  his  partner,  A  but  also  as  to  third  persons  dealing 
with  the  partnership.  A,  however,  is  responsible  individually  upon 
the  partnership  contracts  with  third  persons,  and  cannot  take  advan- 
tage of  B's  infancy.     It  is  no  defense  for  him. 

Drunken  persons,  insane  persons,  and  idiots  cannot  enter  into 
partnership  agreements.  A  married  woman  could  not  enter  into  con- 
tracts at  common  law,  but  by  statute  is  now  permitted  to  make  con- 
tracts, with  a  few  minor  limitations,  such  as  acting  as  surety  for  her 
husband,  or  making  contracts  with  her  husband. 


COMIVIERCIAL  LAW  67 

69.  Partnership  Name.  The  members  of  a  partnership  may 
use  any  name  they  desire,  so  long  as  the  name  does  not  interfere  with 
the  fixed  rights  of  others.  The  members  of  a  partnership  may  use 
the  name  of  one  of  the  partners,  or  the  combined  names  of  all,  or  of  a 
part  of  the  partners,  or  a  name  separate  and  distinct  from  the  names 
of  any  of  the  partners.  For  example,  if  ^,  B,  and  C  form  a  partner- 
ship, they  may  use  as  a  partnership  name,  "The  A  Co.,"  "The  A,  B, 
Co.,"  "The  A,  B,  C  Co.,"  "The  X  Co.,"  or  any  fictitious  name  they 
may  determine  upon.  Some  states  provide  by  statute,  that  a  partner- 
ship using  a  name  not  revealing  the  individual  members  of  a  partner- 
ship, must,  in  order  to  sue  in  the  partnership  name,  file  with  a  county 
official  the  names  of  the  members  composing  the  firm.  Other  states 
by  statute  prohibit  the  use  of  fictitious  names. 

A  partnership  cannot  be  bound  by  any  other  name  than  its  own. 
Where  a  partnership  has  adopted  a  firm  name,  contracts  made  in 
the  name  of  one  of  the  individual  members  do  not  bind  the  partner- 
ship. A  partnership  may  change  its  firm  name.  This  may  be  done  by 
agreement,  express  or  implied.  If  the  members  of  a  partnership  do 
not  expressly  agree  to  change  the  name,  but  a  new  name  is  used  by 
one  or  more  of  the  members,  and  the  change  is  acquiesced  in  by  the 
other  members,  they  are  deemed  in  law  to  have  agreed  to  the  new  name. 
A  partnership  may  use  two  firm  names.  This  sometimes  occurs 
when  a  firm  has  branches.  One  name  is  used  for  one  branch  and 
another  for  the  second  branch.  In  this  event  the  partners  are  liable 
for  contracts  made  in  either  name. 

70.  Names  Applied  to  Different  Kinds  of  Partners.  Depend- 
ing upon  the  nature  of  their  relationship  to  the  partnership,  part- 
ners are  said  to  be  secret,  silent,  ostensible,  nominal,  or  dormant. 

A  secret  'partner  is  one  who  keeps  the  fact  of  his  membership  in 
the  partnership  from  the  public.  This  does  not  enable  him  to  escape 
liability  as  a  partner.  He  is  in  the  position  of  an  undisclosed  principal. 
(See  "Undisclosed  Principal,"  chapter  on  Agency.)  So  long  as  a  secret 
partner  keeps  the  fact  of  his  membership  from  the  public,  of  course  he 
will  not  be  sued  as  a  member.  But  his  Uability  exists  in  spite  of  this 
secret,  and  when  discovered  his  liability  may  be  enforced. 

A  silent  partner  is  one  who  takes  no  active  part  in  the  operation 
of  the  partnership  business.  His  name  may  be  known  as  a  partner, 
or  not.    He  is  not  necessarily  a  secret  partner.     He  may  be  well 


68  COMMERCIAL  LAW 

koown  as  a  member  of  the  partnership,  but  if  he  takes  no  active  part 
in  the  management,  he  is  said  to  be  a  silent  partner.  A  silent  partner 
is  individually  liable  for  the  obligations  of  the  partnership,  the  same 
as  any  partner 

An  ostensible  partner  is  one  who  permits  himself  to  be  held  out 
or  represented  as  a  partner,  when  in  fact  he  is  not  a  partner.  He  is 
responsible  as  a  partner  to  third  persons  who  deal  with  the  firm,  and 
to  whom  he  has  been  held  out  as  a  partner.  For  example,  A  and  B 
trade  as  the  Rod  way  Co.,  A  in  company  with  C,  tries  to  buy  goods 
of  D.  D  knows  C  but  does  not  know  A  and  B.  A  with  C's  consent, 
tells  D  that  C  is  a  member  of  the  Rodway  Co.  C  is  liable  as  an  os- 
tensible partner.  More  commonly  the  ostensible  partner  permits 
his  name  to  be  used  as  a  part  of  the  partnership  name  when  in 
fact  he  is  not  a  member  of  the  partnership.  If  A  and  B  form 
a  partnership  and  with  C's  consent  use  the  name,  "A  B  and  C  Co.," 
C  is  liable  on  the  partnership  obligations,  in  spite  of  the  fact  that  as 
between  himself  and  A  and  B,  he  is  not  a  partner.  If  a  partner  is 
advertised  to  third  parties  as  such,  without  his  knowledge  or  consent, 
he  is  an  ostensible  partner,  but  is  not  liable  as  a  partner. 

A  nominal  partner  is  one  who  permits  his  name  to  be  used  as  a 
member  of  the  partnership  without  being  a  member  of  the  partner- 
ship. Ordinarily  he  is  paid  something  for  the  use  of  his  name,  but 
does  not  have  a  share  in  the  profits.  A  nominal  partner  is  liable  to 
third  persons  as  a  partner,  but  as  to  the  other  partners,  he  does  not 
have  the  rights  or  liabilities  of  a  partner. 

The  term,  dormant  partner,  is  sometimes  used  synonymously  with 
secret  partner.  Technically,  it  means  that  the  partner  is  both  un- 
known and  silent.  It  combines  the  elements  of  a  secret  and  a  silent 
partner. 

The  terms,  general  and  special  partner,  are  commonly  used. 
By  general  partner,  is  meant  the  one  who  shares  equally  in  the  profits 
and  losses  of  the  partnership  transactions.  The  term,  special  part- 
ner, means  that  the  partner,  as  between  the  other  partners,  does  not 
share  equally  in  the  profits,  nor  is  he  responsible  to  the  other  partners 
for  an  equal  share  of  the  losses.  As  to  third  persons,  the  terms 
general  and  special  partners  have  no  significance;  for  example,  if  A, 
B  and  C  enter  into  a  partnership,  .1  and  B  each  to  furnish  two  fifths 
of  the  capital,  and  each  to  have  two  fifths  of  the  profits,  and  C  is  to 


COMMERCL\L  LAW  69 

furnish  one  fifth  of  the  capital,  and  receive  one  fifth  of  the  profits,  A 
and  B  are  general  partners  and  C  is  a  special  partner.  As  to  third 
persons  dealing  with  the  partnership  A,  B  and  C,  each  are  individually 
liable. 

71.  Partnership  Agreements  as  between  Partners.  In  consid- 
ering the  question  as  to  whether  a  partnership  exists,  it  must  be 
regarded  from  two  points.  First,  is  there  a  partnership  as  between 
partners;  second,  is  there  a  partnership  as  to  third  persons?  A 
partnership  may  exist  as  between  the  partners  themselves.  AMien  a 
partnership  exists  between  the  partners  themselves,  there  can  be  no 
question  about  its  existing  as  to  third  persons. 

As  between  the  partners  themselves,  a  partnership  cannot  exist 
unless  there  is  a  contract  express  or  implied,  by  which  they  mutually 
agree  or  consent  to  the  partnership.  If  A  and  B  agree,  either  orally 
or  in  writing,  to  engage  in  a  partnership  enterprise,  and  do  so  engage 
in  a  joint  business,  a  partnership  exists  between  them.  If  A  trades 
alone  as  the  "A  Co."  and,  desiring  to  obtain  credit  from  B,  tells  B 
that  C  is  a  member  of  the  A  Co.,  even  though  C  ratifies  the  unau- 
thorized act  of  ^,  by  stating  to  B  that  he  is  a  member  of  the  A  Co., 
this  does  not  constitute  him  as  a  partner  to  A.  As  to  B,  however, 
he  is  a  partner  and  is  liable  as  such.  As  to  A,  he  is  not 
a  partner,  and  is  not  entitled  to  a  share  in  the  profits.  If  the 
intent  of  the  parties  to  form  a  partnership,  is  clear,  from  their  express 
agreement,  or  from  an  agreement  implied  from  their  acts  or  conduct, 
a  partnership,  without  question,  exists  between  them.  Many  busi- 
ness arrangements  are  made  by  which  property,  skill,  or  labor  is  com- 
bined under  peculiar  arrangements,  as  to  the  division  of  profits  and 
losses,  making  it  difficult  to  tell  whether  a  partnership  exists.  It  is 
not  essential  that  the  word,  "partnership,"  be  used  to  have  an  agree- 
ment constitute  a  partnership.  If  it  is  the  intent  of  the  parties  there- 
to to  create  a  partnership,  one  exists  regardless  of  the  term  used. 
An  agreement  to  share  losses,  or  to  share  profits  in  an  enterprise,  is 
some  evidence  of  a  partnership,  but  is  not  sufficient  of  itself  to 
constitute  a  partnership.  A  and  B  may  agree  each  to  furnish 
his  own  tools  in  drilling  an  oil  well,  and  if  a  profit  is  made,  to  divide 
the  profits,  and  if  a  loss  is  sustained  to  bear  the  loss  out  of  their  in- 
dividual funds.  These  facts,  do  not  show  an  intent  to  form  a  part- 
nership, and  do  not  make  A  and  B  partners  as  to  themselves.     If, 


70  COMMERCIAL  LAW 

however,  A  and  B  contribute  one  hundrecJ  dollars  ($100.00)  each  to 
a  partnership  fund,  and  combine  the  tools  possessed  by  each  toward 
a  partnership  fund,  and  agree  to  share  equally  the  profits  and  losses, 
the  intention  is  clear  that  a  partnership  is  intended,  and  these  facts 
constitute  A  and  B  partners. 

72.  Partnership  as  to  Third  Parties.  Where  a  partnership 
exists  as  between  the  partners  themselves  there  is  no  question  about 
its  existing  as  to  third  persons  dealing  with  the  partnership  as  such. 
A  party  cannot  hold  himself  out  to  the  world  as  a  partner,  and  by 
means  of  a  private  arrangement  with  his  apparent  partners,  evade 
liability  as  a  partner.  It  is  generally  conceded  that  a  secret  arrange- 
ment made  between  partners  that  one  shall  not  be  liable  as  a  partner, 
if  made  known  to  a  third  person  dealing  with  the  partnership,  will 
relieve  the  apparent  partner  from  liability  to  such  third  person. 
For  example,  if  A  and  B  are  doing  business  as  the  "A  B  Co.," 
and  A  lends  his  name  to  the  company  for  a  fixed  consideration,  B 
receives  all  the  profits  and  is  liable  for  all  the  debts.  If  C  deals  with 
the  "A  B  Co.,"  not  knowing  of  the  private  contract  between  A  and 
B,  A  is  liable  individually  upon  the  contract.  If,  however,  C  at  the 
time  he  deals  with  the  "A  B  Co.,"  is  informed  of  the  actual  connec- 
tion of  A  with  the  company,  he  cannot  hold  A  liable  as  a  partner 

If  a  third  person  extends  credit  to  one  of  the  partners,  knowing 
that  the  purchase  is  for  the  benefit  of  the  partnership,  he  can  hold 
liable,  only  the  party  to  whom  he  extended  credit.  If,  however,  he 
sells  to  one  of  the  partners,  not  knowing  that  he  is  a  partner  of  a  firm, 
and  the  firm  gets  the  benefit  of  the  purchase,  the  firm  is  liable  for 
the  debt. 

A  partnership,  Hke  a  principal  in  agency,  is  liable  for  the  torts 
or  private  wrongs  of  the  individual  partners,  committed  in  the  course 
of  the  partnership  business.  If  ^,  a  member  of  the  A  B  Co.  part- 
nership, uses  fraud  in  purchasing  goods,  the  A  B  Co.,  is  liable 
for  the  fraud.  If  A,  a  member  of  the  A  B  Co.,  gas  fitters,  care- 
lessly connect  a  gas  burner,  thereby  causing  an  explosion,  and  injury 
to  C,  the  A  B  Co.,  is  liable  for  the  injury. 

73.  Powers  and  Property  of  a  Partnership.  A  partnership  has 
the  power  to  transact  business  in  its  firm  name.  Unless  pro- 
hibited by  statute,  it  may  sue  and  be  sued  in  its  firm  name,  regardless 
of  the  names  of  the  individual  partners. 


COMMERCIAL  LAW  71 

Each  member  of  a  partnership  is  regarded  as  an  agent  of  all 
the  other  members  of  the  partnership,  with  authority  to  bind  the 
partnership  by  any  contract  made  within  the  scope  of  the  partner- 
ship business.  A  partner  may  deal  individually  in  matters  outside 
the  scope  of  the  partnership  business.  For  example,  A,  B  and  C 
form  a  partnership  for  the  purpose  of  buying,  selling  and  leasing 
real  estate.  A,  B  and  C  are  authorized  to  act  for  each  other,  in  doing 
all  the  things  reasonably  connected  with  the  transaction  of  real  estate 
business.  If  A  orders  groceries  in  the  firm  name,  his  partners  may 
deny  and  avoid  the  obligation,  on  the  ground  that  is  is  not  within 
the  scope  of  the  partnership  affairs.  The  grocer  selling  A  groceries 
in  the  firm  name  cannot  claim  that  B  and  C  authorized  A  to  buy 
groceries.  The  purchase  Is  clearly  outside  the  real  estate  business. 
If,  however,  A  purchases  a  house  and  lot  in  the  firm  name  and  uses 
it  personally,  the  seller  can  hold  the  partnership  for  the  purchase 
price.  A  partnership  is  empowered  to  sign  notes,  only  when  neces- 
sary to  the  transaction  of  the  partnership  business.  Partnerships 
may  hold  the  title  to  personal  property  in  the  name  of  the  firm.  This 
does  not  prevent  the  individual  members  from  holding  property  in- 
dividually at  the  same  time.  As  between  the  partners  themselves, 
only  that  personal  property  mutually  agreed  to  belong  to  the  part- 
nership is  partnership  funds.  Even  as  to  third  persons  dealing  with 
the  partnership,  the  actual  agreement  of  the  individual  members  as 
to  what  is,  and  what  is  not  partnership  funds  governs,  except  in  the 
case  of  fraud.  A  partnership  cannot  represent  that  it  owns  certain 
property,  or  that  certain  purchases  are  made  for  the  partnership  for 
the  purpose  of  obtaining  credit,  and  then  claim  that  it  is  owned 
by  an  individual  member.  Property  purchased  by  partnership  funds, 
or  improved  with  partnership  funds,  belongs  to  the  partnership. 
Real  estate  purchased  with  partnership  funds  is  regarded  as  belong- 
ing to  the  firm,  even  though  title  is  held  in  the  name  of  one  of  the 
partners.  The  partner  in  whose  name  the  property  is  held  is  said 
to  be  the  legal  owner,  but  the  partnership  is  the  equitable  owner. 
Firm  creditors  may  subject  it  to  pay  firm  obligations. 

74.  Liability  of  Persons  Held  Out  as  Partners.  If  a  person 
permits  himself  to  be  held  out  as  a  partner,  he  will  be  bound  as  a 
partner,  as  to  third  persons  dealing  with  the  partnership  with  this  in 
view.     It  matters  not  that  the  party  held  out  as  a  partner  is  not  a 


72  COMMERCIAL  LAW 

partner  in  fact.  The  real  relation  will  protect  the  apparent  partner, 
as  against  the  other  partners,  but  not  as  against  third  parties  who 
deal  with  the  firm,  relying  upon  his  being  a  partner.  What  amounts  to 
being  held  out  as  a  partner  is  a  question  of  fact,  which  must  be  deter- 
mined by  the  circumstances  surrounding  each  particular  case.  If  A, 
without  authority  of  B,  tells  C  that  B  is  his  partner  in  the  shoe  business 
and  that  they  are  trading  as  the  "A  B  Co.,"  and  C  sells  them  an  order 
of  shoes,  without  investigating  whether  B  actually  is  a  partner,  B  is  not 
liable  as  a  partner  for  the  obligation.  The  authority  to  hold  a  person 
out  as  a  partner  must  come  from  the  partner  so  held  out.  It  may  come 
from  his  assent  or  his  neglect  in  denying  the  relationship  when  he 
learns  that  he  is  being  advertised  as  a  partner.  For  example,  suppose 
A  borrows  five  hundred  dollars  ($500.00)  of  B  and  promises  to  give 
B  a  one-half  interest  in  his  grocery  business,  if  B  so  desires,  on  con- 
dition that  B  spend  his  afternoons  working  in  the  store,  and  B,  not 
considering  himself  a  partner,  permits  C  to  tell  third  persons  that  he  is 
a  partner.  Asa  result,  B  cannot  deny  partnership  liability  as  against 
third  persons  who  consider  him  a  partner  in  dealing  with  the  part- 
nership. 

75.  Duties  and  Liabilities  of  Partners  as  to  Each  Other. 
The  relation  of  partners  to  each  other  is  a  contract  relation.  Each 
partner  must  carry  out  the  terms  of  the  contract.  Ordinarily,  part- 
nerships require  the  devotion  of  the  entire  time  and  attention  of 
each  partner  to  the  partnership  business.  Partners  are  not  per- 
mitted to  engage  in  any  business  for  themselves  which  will  interfere 
with  the  partnership  business,  or  take  their  time  and  attention 
away  from  the  partnership  business.  Each  partner  owes  that  duty 
of  fidelity  to  the  other  members  of  the  partnership.  A  partner  as 
an  individual  may  deal  with  the  firm,  and  may  act  as  agent  for 
others  in  dealing  with  the  firm,  if  it  is  with  the  consent  and  knowl- 
edge of  the  other  partners.  A  partner  cannot  sell  his  interest  in 
the  firm  to  another,  and  have  the  new  partner  take  his  place  as  a 
member  of  the  partnership,  without  the  consent  of  the  other  partners. 
In  any  event,  the  withdrawal  of  one  partner  and  the  substitution  of 
another  dissolves  the  old  partnership  and  establishes  a  new  partner- 
ship. One  partner  may  assign  or  transfer  his  interest  in  a  partner- 
ship but  this  dissolves  the  partnership,  and  gives  the  purchaser  the 
right  to  his  seller's  interest  in  the  funds  of  the  partnership.     It  gives 


COMMERCIAL  LAW  73 

the  purchaser  no  right  to  participate  in  the  management  of  the  busi- 
ness. 

If  by  the  terms  of  a  partnership  agreement,  the  partnership 
is  to  subsist  for  a  specified  length  of  time,  and  one  partner  with- 
draws or  refuses  to  continue,  he  is  Uable  in  damages  to  the  other 
partners,  for  breach  of  contract.  If  the  partnership  is  organized  with- 
out regard  to  any  specified  duration,  a  partner  may  withdraw  at 
will,  and  thus  dissolve  the  partnership.  Partners  must  devote  their 
entire  time  and  attention  to  the  business,  unless  the  partnership  agree- 
ment provides  otherwise.  Each  partner  is  entitled  to  an  equal  share 
of  the  profits.  If  one  partner  deals  unfairly  with  another,  the  latter 
cannot  bring  an  ordinary  suit  at  law  for  recovery  of  the  amount 
due  him,  or  for  his  damages,  but  he  must  bring  a  suit  in  equity,  setting 
up  the  facts,  and  must  demand  an  accounting.  The  court  will  then 
determine  the  rights  of  the  partners.  If  a  partnership  is  dissolved, 
and  the  partners  expressly  agree  that  a  certain  sum  is  owing  by  one 
partner  to  another,  the  latter  may  sue  the  former  for  this  amount, 
in  an  ordinary  action  at  law.      * 

76.  Liability  of  Partnership  to  Third  Persons.  A  partner- 
ship is  liable  as  such,  upon  its  contracts  to  third  persons.  This 
means  that  the  obligation  is  in  the  nature  of  a  joint  one  against  all 
the  partners,  and  not  a  several  one  against  the  individual  partners. 
There  is  an  individual  liability  of  each  partner,  called  a  liability  of 
each  partner  in  solido.  This  liability  is  discussed  in  this  section 
under  the  title,  "Liability  of  Individual  Members  of  a  Partnership." 
A  third  person,  in  commencing  a  suit  against  a  partnership,  must 
sue  all  the  partners,  or  be  subject  to  the  risk  of  having  the  case  dis- 
missed at  the  objection  of  the  one  sued.  All  the  property  of  a  part- 
nership may  be  subjected  to  the  payment  of  partnership  obligations. 

77.  Liability  of  Individual  Members  of  a  Partnership  for 
Partnership  Obligations.  \\Tiile  a  suit  brought  against  one  partner 
for  a  partnership  debt  may  be  dismissed  if  objected  to  by  the  partner 
sued,  if  not  objected  to,  and  judgment  is  taken,  it  may  be  enforced 
against  the  individual  assets  of  the  partner  sued.  In  this  event,  in 
most  jurisdictions,  the  other  partners  are  discharged  from  liability. 
If  the  partnership  is  sued  either  in  the  partnership  name,  or  in  the 
name  of  all  the  individual  partners,  the  individual  members  are  still 
liable  in  solido  for  the  debt.  By  in  solido  is  meant,  liable  Jor  the  whole. 


74  COMMERCIAL  LAW 

If  one  partner  is  compelled  to  pay  all  or  more  than  his  proportion 
of  a  partnership  debt,  he  may  recover  the  excess  of  his  share,  ratably 
from  the  other  partners. 

A  member  of  a  partnership  may  have  partnership  assets  and 
individual  assets.  A  creditor  of  the  partnership  may  satisfy  his  claim 
out  of  the  firm  assets,  or  out  of  a  partner's  individual  assets,  except 
where  there  are  individual  creditors.  In  the  latter  event,  the  part- 
nership creditors  cannot  subject  individual  partners  assets  to  the 
disadvantage  of  the  individual  creditors.  On  the  other  hand,  in- 
dividual creditors  cannot  subject  a  partner's  share  in  the  partner- 
ship assets  to  the  disadvantage  of  partnership  creditors.  This 
means  that  in  case  of  insolvency  of  either  a  partner  or  of  the  part- 
nership, firm  creditors  must  first  exhaust  firm  assets,  and  take  the 
balance  of  individual  assets  after  individual  creditors  have  been 
satisfied.  It  means,  further,  that  individual  creditors  must  satisfy 
their  debts  out  of  individual  partner's  assets,  and  can  only  subject 
the  balance  of  firm  assets  after  firm  creditors  have  been  satisfied. 
If  there  are  no  partnership  assets  at  all,  and  no  solvent  partners, 
firm  creditors  are  treated  on  the  same  basis  as  individual  creditors, 
and  the  individual  assets  of  the  partners  are  divided  'pro  rata 
among  partnership  and  individual  creditors  alike. 

78.  Change  of  Membership.  A  partnership  depends  for  its 
existence  upon  the  continuation  of  the  same  membership.  If  one 
partner  withdraws,  the  partnership  is,  by  that  act,  dissolved.  If  a 
new  member  is  admitted,  the  partnership  is  dissolved  and  a  new  one 
created.  A  partner  cannot  escape  his  liabilty  as  a  partner  by  with- 
drawing from  the  partnership.  By  this  act,  he  terminates  the  part- 
nership, and  no  further  liabilities  can  be  created  against  him  except 
as  to  those  persons  having  no  notice  of  his  withdrawal;  but  he  is  still 
liable  for  the  old  partnership  debts.  A  substituted  partner  is  not 
liable  for  the  debts  incurred  before  he  enters  the  firm,  unless  he  ex- 
pressly assumes  such  debts.  If  he  expressly  assumes  them,  this  does 
not  relieve  the  outgoing  partner  from  liability,  unless  this  is  assented 
to  by  partnership  creditors.  If  it  is  borne  in  mind  that  a  change 
in  membership  dissolves  a  partnership,  and  any  partnership  that 
exists  thereafter  is  separate  and  distinct  from  the  old  one,  and  dates 
from  the  withdrawal  of  the  retiring  partner,  or  admission  of  the  new 
partner,  the  individual  liability  of  the  partners  is  easily  determined. 


COMIVIERCIAL  LAW  75 

For  example,  li  A,  B  and  C  are  partners  in  a  dry  goods  business,  and 
B  withdraws,  B  is  still  personally  liable  for  the  debts  of  the  ^  5  C  Co. 
The  partnership  ceases  at  the  time  of  his  withdrawal.  If  A  sells 
his  interest  to  D,  who  becomes  a  member  with  the  consent  of  B  and 
C,  A  is  still  liable  to  creditors  who  became  creditors  before  A's  with- 
drawal. D  is  not  liable  for  the  debts  incurred  before  his  admission 
as  a  partner,  unless  he  expressly  so  agrees. 

79.  Death  of  a  Partner.  The  death  of  a  partner  terminates 
the  partnership.  The  remaining  partners  may  agree  to  continue  the 
partnership,  which  amounts  to  the  formation  of  a  new  partnership. 
In  case  of  death  of  one  partner,  title  to  the  partnership  property 
is  in  the  surviving  partners.  They  must  collect  the  assets  and  may 
sue  on  firm  obligations.  They  cannot,  as  survivors,  continue  the 
business  further  than  is  necessary  to  wind  up  the  affairs  of  the  part- 
nership. They  must  first  pay  all  firm  obligations,  and  distribute  the 
proceeds  among  themselves  and  the  representatives  of  the  deceased 
partner. 

80.  Survivorship.  Survivorship  is  the  term  applied  to  the 
relation  to  the  partnership  of  the  remaining  partners,  after  a  disso- 
lution. The  partners  remaining  after  a  dissolution  are  known  as 
survivors.  The  title  to  the  partnership  property  vests  in  the  sur- 
vivors, and  they  must  collect  the  assets,  pay  the  liabilities  and 
distribute  the  proceeds  among  themselves  and  the  representatives 
of  the  other  partners.  By  statute,  in  some  states,  surviving  partners 
are  permitted  to  purchase  firm  assets  at  a  fair  appraised  valuation. 
Surviving  partners  have  the  right  to  retain  possession  of  the  part- 
nership property,  and  to  do  those  things  necessary  to  wind  up  the 
affairs  of  the  partnership.  They  are  not  permitted  to  divide  any 
firm  assets  among  themselves,  until  all  firm  debts  are  paid.  If  A,  B 
and  C  are  partners  in  the  grocery  business,  and  C  dies,  the  title  to 
the  property  rests  in  A  and  B,  who  have  the  authority  to  sue  for  the 
debts  owing,  and  may  be  sued  for  the  debts  owed  by  the  firm.  They 
have  the  right  to  draw  checks  on  the  firm  checking  account,  but  no 
right  to  incur  further  obligations.  In  the  absence  of  special  statute, 
they  have  no  right  to  purchase  the  business  for  themselves,  and  if 
they  choose  to  continue  it,  they  do  so  at  their  own  individual  risk, 
and  must  account  for  all  profits  made. 

81.  Dissolution  of  Partnerships.     A  partnership  may  be  dis- 


70  COMMERCIAL  LAW 

solved  by  lapse  of  time.  If  a  partnership  is  entered  into  under  an 
express  agreement  that  it  is  to  subsist  for  a  certain  length  of  time, 
lapse  of  the  stipulated  period  works  a  dissolution.  A  partnership 
may  be  dissolved  by  mutual  agreement  of  the  partners.  A  part- 
nership may  also  be  dissolved  by  any  change  of  membership,  whether 
it  be  the  withdrawal  of  a  member,  admission  of  a  new  member,  or 
death  of  a  member.  Bankruptcy  of  a  member,  or  bankruptcy  of 
the  partnership  itself,  works  a  dissolution.  If  one  party  violates  his 
duties  as  a  partner,  or  if  for  any  reason,  the  partnership  ceases  as  a 
result  of  a  decree  of  court,  there  is  a  dissolution. 

82.  Notice  of  Dissolution.  Persons  who  deal  with  a  partner- 
ship through  one  of  the  partners,  or  through  an  authorized  agent, 
have  the  right  to  assume  that  the  partnership  will  continue  to  exist. 
If  a  partnership  is  dissolved  by  lapse  of  time,  by  mutual  agreement, 
or  by  withdrawal  or  entrance  of  another  partner,  notice  must  be 
given  of  such  change,  to  protect  the  members  of  the  former  partner- 
ship against  contracts  of  third  persons,  made  subsequently  to  the 
dissolution.  Business  people,  who  have  had  former  dealings  with 
the  partnership,  must  receive  actual  notice.  These  notices  may  be 
sent  by  mail,  or  delivered  orally,  or  in  writing.  A  public  announce- 
ment in  a  newspaper  is  sufficient  to  protect  former  partners  against 
contracts  subsequently  made  by  persons  who  have  not  previously 
dealt  with  the  firm.  In  case  of  dissolution  of  a  partnership  by  opera- 
tion of  law,  such  as  by  death  of  a  member,  bankruptcy,  or  decree  of 
court,  no  notice  is  necessary.  The  act  which  causes  the  dissolution 
is  deemed  to  be  notice  to  everyone. 

83.  Distribution  of  Firm  and  Individual  Assets  after  Disso- 
lution. As  a  general  rule,  firm  creditors  are  entitled  to  firm  assets. 
The  balance  goes  to  individual  partners.  Individual  creditors  are 
entitled  to  individual  assets.  The  balance  goes  to  firm  creditors. 
If,  however,  the  partnership  is  insolvent  as  a  firm,  and  there  is  no 
living  solvent  partner,  in  the  distribution  of  firm  assets,  firm  credi- 
tors are  treated  the  same  as  individual  creditors.  Firm  real  estate 
may  be  subjected  by  firm  creditors  to  the  payment  of  their  claims. 
After  firm  creditors  are  satisfied,  firm  real  estate  is  treated  as  the  real 
estate  of  the  individual  members,  and  descends  to  the  heirs  of  the 
partners,  and  does  not  pass  as  personal  property  to  their  personal 
representatives. 


COMMERCIAL  LA\Y  77 

84.  Limited  Partnership.  Most  states  by  statute  permit  limited 
partnerships  to  be  formed.  In  general,  a  limited  partnership  differs 
from  an  ordinary  partnership  in  that  some  of  the  members,  called 
special  partners,  are  not  individually  liable  for  the  obligations  of  the 
partnership.  The  statutes  of  the  different  states  differ  somewhat 
as  to  the  purposes  for  which  a  limited  partnership  may  be  formed. 
In  general,  however,  a  limited  partnership  may  be  formed  to  carry 
on  any  business  except  banking  and  insurance.  A  limited  partner- 
ship must  have  at  least  one  general  partner  who  is  individually  liable 
for  the  obligations  of  the  partnership.  The  special  partners  con- 
tribute certain  fixed  sums,  which  must  be  paid  before  the  partner- 
ship starts  business,  and  beyond  which  the  special  partners  are  not 
liable.  Generally,  special  partners  are  not  permitted  to  manage  the 
business.  A  limited  partnership  is  generally  required  to  file  with 
a  public  officer  a  certificate  showing  its  membership,  the  purpose 
for  which  it  is  organized,  the  number  of  shares  held  by  special  part- 
ners, the  assets,  the  total  capital,  and  the  names  of  the  general  part- 
ners. The  purpose  of  a  limited  partnership  is  to  enable  persons 
to  invest  a  certain  amount  of  capital  in  an  enterprise  without  being 
individually  responsible  beyond  the  amount  actually  invested. 
Limited  partnerships  are  now  largely  supplanted  by  corporations. 

85.  Form  of  Partnership  Agreement. 

Articles  of  agreement  entered  into  at  Chicago,  111.,  this day 

of  ....  1909,  by  and  between  A,  hereinafter  designated  as  the  first 
party,  and  B,  hereinafter  designated  as  the  second  party,  both  of 
Chicago,  111.  Witnesseth  that: 

1.  Said  parties  agree  to  enter  into  a  partnership  for  the  purpose 
of  engaging  in  and  carrying  on  a  general  hardware  business 

•  in  the  city  of  Chicago  under  the  name  of  Cook  County  Hardrrnre 
Co. 

2.  The  first  party  agrees  to  furnish  his  stock  of  goods,  now 
located  at  his  present  hardware  store  in  Chicago,  and  .said 
second  party  agrees  to  contribute  $5,000.00  in  cash  immedi- 
ately upon  the  signing  of  the  agreement,  said  stock  of  goods, 
and  said  $5,000.00,  to  constitute  the  joint  capital  of  the  part- 
nership. 

3.  Said  parties  agree  to  devote  their  entire  time  and  attention  to 
the  interests  of  the  partnership  business. 

4.  Said  parties  agree  to  share  equally  the  losses  and  expenses  of 
said  partnership,  and  at  the  e.xpiration  of  each  montli,  to 
divide  equally  the  net  profits  reserving  a  fund  sufficient  to 
keep  the  original  capital  intact. 


7S  COMMERCIAL  LAW 

5.  Said  parties  agree  that  the  partnership  shall  continue  as  long 
as  the  partners  shall  mutually  so  desire.  In  the  event  of  either 
party's  desiring  to  withdraw,  said  parties  agree  that  each  shall 
choose  one  arbitrator,  the  two  thus  chosen  to  select  a  third, 
who  shall  appraise  the  assets  of  the  firm,  and  divide  them  into 
parts,  which  division  shall  be  accepted  as  final  by  the  parties 
hereto.  And  each  party  agrees  to  accept  the  portion  allotted 
to  him  by  said  arbitrators. 

In  witness  whereof,  the  parties  hereto  have  set  their  hands  the 
day  and  year  above  written. 
Signed 

A 

B 

Signed  in  the  presence  of 

C 

D 

CORPORATIONS 

86.  Nature  of  a  Corporation.  A  corporation  has  been  de- 
fined to  be  "a  collection  of  many  individuals  into  one  body,  under 
a  Specific  denomination  having  perpetual  succession,  under  an  arti- 
ficial form  and  vested  by  the  policy  of  the  law,  with  the  capacity  of 
acting  in  several  respects  as  an  individual."  In  other  words  corpora- 
tion is  the  name  applied  to  an  association  of  persons  authorized  by 
law  to  create,  by  mutual  contribution,  a  common  fund  for  the  pur- 
pose of  transacting  business  without  rendering  the  individual  mem- 
bers personally  liable  for  the  debts  of  the  association,  beyond  a  cer- 
tain amount.  The  object  is  to  permit  persons  to  obtain  the  advan- 
tage of  large  combinations  of  capital  without  involving,  beyond  cer- 
tain limits,  the  private  property  of  the  individuals  composing  it.  ""A 
corporation  is  an  artificial  person  having  an  existence  in  many  re-, 
spects  separate  and  apart  from  the  members  composing  it.  "\Miile 
it  can  only  transact  business  by  means  of  agents,  the  obligations 
created  are  the  obligations  of  the  artificial  person,  the  corporation. 
The  common  fund  or  capital  of  the  corporation,  is  the  only  property 
that  can  be  subjected  in  pa}Tnent  of  the  debts.  The  individual 
property  of  the  members  is  not  the  property  of  the  corporation. 

87.  Corporations  Distinguished  from  Partnerships.  A  part- 
nership may  be  created  by  mutual  consent  of  the  parties  desiring 
to  engage  in  that  joint  enterprise.  The  only  limitation  is  that  the 
enterprise  must  be  for  a  lawful  purpose.  A  person  may  form  a  part- 
nership for  the  transaction  of  any  kind  of  business  which   he  may 


COMMERCIAL  LAW  79 

transact  as  an  individual.  A  corporation,  on  the  other  hand,  must 
have  permission  from  the  goverument  to  transact  business.  This 
permission  is  called  its  franchise.  Corporations  cannot  be  formed 
for  every  purpose.  That  is,  individuals  are  permitted  to  engage  in 
lines  of  business  denied  to  corporations.  A  corporation  is  an  arti- 
ficial person,  regarded  in  law  as  distinct  from  the  individuals  com- 
posing it.  A  partnership  is  not  distinct  from  the  individuals  com- 
posing it,  and  the  individual  members  are  personally  liable  for  the 
debts  of  the  partnership.  A  corporation  has  a  continuous  existence; 
it  continues  to  live  regardless  of  death  of  some  of  its  members,  or 
regardless  of  a  change  of  membership.  A  partnership  ceases  to 
exist  upon  the  death  of  a  member,  or  by  a  change  of  membership. 
A  corporation's  members  do  not  have  the  right,  as  such,  to  act  as 
agents  of  the  corporation  for  the  purpose  of  transacting  business. 
The  agents  of  the  corporation  are  appointed  in  a  manner  prescribed 
by  law,  and  by  the  rules  of  the  corporation.  In  a  partnership,  each 
member  is  the  recognized  and  authorized  agent  of  the  partnership. 
Each  member  may  bind  the  partnership  by  any  contract  made  within 
the  scope  of  the  partnership  business.  For  example,  if  A  and  B 
form  a  partnership  for  the  purpose  of  selling  real  estate,  either  A  or 
B  by  reason  of  the  partnership  agreement,  is  authorized  to  sell  real 
estate  in  the  name  of  the  firm.  li  A,  B,  C,  D,  and  E  are  stockholders 
in  the  X  Co.  neither  A,  B,  CyD  or  E  is  entitled,  by  reason  of  his 
being  a  stockholder,  to  make  contracts  for  the  corporation.  A  board 
of  directors  must  be  elected  by  the  stockholders,  who  in  turn  elect 
ofiicers,  and  appoint  agents  authorized  to  transact  the  business  of 
the  corporation. 

88.  Powers  of  a  Corporation.  Corporations  are  not  permitted, 
as  such,  to  transact  business  of  every  kind.  A  corporation  is  an 
artificial  being  created  by  law.  It  can  exist  only  for  those  purposes 
enumerated  by  law.  Corporations,  as  such,  have  well  recognized, 
or  distinguished,  powers  or  characteristics.  The  ordinary  powers 
of  a  corporation  are  as  follows: 

First — The  power  of  perpetual  succession. 

Second — The  right  to  sue  and  be  sued,  and  to  receive  and  grant 

in  their  corporate  name. 
Third — The  right  to  purchase  and  hold   real  estate  and  personal 

property. 
Fourth — The  right  to  have  a  common  seal. 
Fifth — The  right  to  make  by-laws. 


80  COMMERCIAL  LAW 

It  was  long  ago  decided  that  a  franchise  given  by  the  govern- 
ment to  a  corporation,  cannot  be  revoked  or  changed  by  the  govern- 
ment, unless  such  a  reservation  is  made  by  the  government  at  the  time 
the  franchise  is  granted.  At  present,  such  reservations  are  made  in 
granting  most  franchises,  either  by  express  reservation  in  the  franchise 
itself,  by  general  statutory  provision,  or  by  constitutional  limitations. 

89.  Creation  of  Corporations.  A  corporation  cannot  be  or- 
ganized merely  by  agreement  of  the  members.  It  must  obtain  per- 
mission of  the  government,  state  or  national,  to  operate  as  a  corpora- 
tion, before    it  can  lawfully  exercise  any  corporate  rights. 

Originally,  the  right  to  become  a  corporation  was  granted  by 
express  permission  of  the  king.  The  franchise,  or  right  granted, 
was  called  the  corporate  charter.  In  this  country,  charters  originally 
were  granted  by  special  legislative  grants.  While  the  United  States 
Constitution  does  not  expressly  provide  for  the  formation  of  national 
corporations,  Congress  is  deemed  to  have  the  right  to  create  them 
for  the  purpose  of  carrying  out  the  express  functions  of  the  govern- 
ment, expressly  granted  by  the  United  States  Constitution.  For 
example,  the  Constitution  expressly  grants  the  United  States  Congress 
the  power  to  coin  money  and  regulate  the  value  thereof,  and  to  levy 
and  collect  taxes.  It  is  given  no  express  power  to  organize  national 
banks,  but  under  the  provisions  giving  it  power  to  make  laws  to  carry 
into  execution  all  of  the  powers  expressly  granted,  it  is  held  to  have 
the  power  to  provide  for  the  organization  of  national  banks.  "^ 

Most  corporations  are  organized  under  state  laws.  Originally, 
charters  were  granted  by  special  acts  of  the  state  legislatures.  These 
charters  were  decided  to  be  contracts  between  the  state  and  the  cor- 
poration, which  could  not  be  changed  or  revoked  at  the  desire  of  the 
legislature.  At  the  present  time,  most  states  have  general  permissive 
statutes,  under  which  corporations  may  be  organized.  These  statutes 
generally  reserve  the  right  to  the  state,  to  revoke  or  change  the  charter 
at  the  will  of  the  legislature.  INIany  states  have  constitutional  pro- 
visions limiting  the  power  of  the  legislature  to  grant  irrevocable 
charters.  The  statutes  of  the  different  states  vary  somewhat  as  to 
the  things  required  of  persons  desiring  to  organize  a  corporation, 
but  the  primary  requirements  are  similar.  In  general,  the  following 
are  the  statutory  requirements  of  the  states  for  the  organization  of  a 
corporation.     The  persons  desiring  to  organize  a  corporation,  not 


COMMERCIAL  LAW  SI 

less  than  three  (some  states  require  more),  a  majority  of  whom  are 
citizens  of  the  state,  must  sign  a  paper,  called  articles  of  incorporation, 
which  contains  the  name  of  the  proposed  corporation,  the  place  where 
it  is  to  be  located,  the  purpose  for  which  it  is  to  be  formed,  and  the 
place  where  its  principal  business  is  to  be  transacted,  the  amount  of 
its   capital  stock,  and  the  number  of   shares  into  which  it  is  to  be 
divided.     The  articles  of  incorporation  are  sent  to  a  designated  state 
officer,  usually  the  Secretary  of  State.     Upon  the  filing  of  the  articles 
of  incorporation   with   the  proper  state   officers,   the   incorporators 
may  open  the  books  of  the  company,  for  stock  subscriptions.    The 
time   and   place   of   opening   the   books  is    announced,  usually  by 
thirty  days  advertising  in  a  newspaper.     A  portion  of  the    stock, 
usually  ten   percent,  must  be  paid  at  the  time  the  subscription  is 
made.     When   the    required    portion    of    the    authorized    capital 
stock    is   subscribed,  by    advertising    notice,  the    stockholders  may 
meet  and   elect   a   board   of   directors.     The   board    usually   con- 
sists of  from  five  to  fifteen  directors.     The  directors  are  required  to 
take  an  oath  of  office.     Some  of  the  governing  rules  of  the  corpora- 
tion, usually  called  by-laws  or  regulations,  are  enacted  by  the  stock- 
holders.    Some  regulations  may  be  enacted  by  the  board  of  directors. 
The  board  of  directors  may  elect  the  officers  provided  for  by  the 
regulations,  and  then  proceed  to  transact  the  business  of  the  corpora- 
tion.    Corporations  not  for  profit   may  be  organized.     Such  corpo- 
rations are  organized  in  the  same  manner  as  corporations  for  profit, 
except  that  there  is  no  capital  stock,  and  the  directors  are  usually 
called  trustees.     Church  and  fraternal  organizations  are  common  ex- 
amples of  corporations  not  for  profit. 

90.  Names  of  Corporations.  A  corporation  must  of  necessity 
have  a  name  by  which  it  may  be  designated,  and  under  which  it 
can  transact  business.  The  statutes  of  the  different  states  gener- 
ally provide  that  the  incorporators  must  designate  the  name  which 
the  corporation  is  to  use.  One  corporation  is  not  permitted  to  use  a 
name  already  appropriated  by  another  corporation.  A  corporation 
has  no  right  to  use  a  name  other  than  the  one  given  it  by  its  charter. 
A  corporation  may  prevent  by  injunction  another  organization  from 
using  a  name  which  interferes  with  its  corporate  name.  This  is 
subject  to  the  limitations  that  a  corporation  is  not  permitted  to  ap- 
propriate a  name  descriptive  of  an  article  or  place.     For  example,  a 


82  COMMERCIAL  LAW 

storage  company  was  incorporated  under  the  name  of  the  "Fireproof 
Storage  Co."  An  individual  with  a  fireproof  building  adopted  the 
trade  name  "The  Allen  Fireproof  Storage  Co."  The  former  com- 
pany was  not  permitted  to  enjoin  the  latter  from  using  the  word  Fire- 
proof,  in  the  name  of  his  company,  since  the  word,  fireproof  is 
descriptive  of  the  kind  of  building  used  in  the  business,  and  cannot 
be  appropriated  by  any  one  company  or  person.  The  states  gener- 
ally, by  statute,  provide  a  means  by  which  a  corporation  may  change 
its  name. 

91.  Kinds  of  Corporations.  Corporations  are  usually  classi- 
fied as  public  and  private.  Public  corporations  include  those  cor- 
porations organized  for  the  purpose  of  exercising  public  functions, 
and  for  carrying  out  government  purposes.  An  incorporated  city 
or  village  is  a  common  example. 

A  private  corporation  is  one  organized  for  the  private  benefit 
of  its  members.  Private  corporations  are  either  corporations  for 
profit  or  corporations  not  for  profit.  Corporations  for  profit  have 
a  capital  stock,  and  are  organized  for  the  financial  benefit  of  the  mem- 
bers. Ordinary  trading  or  manufacturing  corporations  are  exam- 
ples. Corporations  not  for  profit  have  no  capital  stock,  and  are  or- 
ganized for  charitable  or  social  purposes.  Clubs,  educational  in- 
stitutions, and  churches  are  common  examples. 

Corporations  organized  for  private  gain,  and  which  serve  some 
public  purpose,  are  sometimes  classified  as  quasi-public  corporations. 
Express  companies  and  telegraph  and  railway  companies  are  common 
examples  of  the  class.  These  companies  are  strictly  private  corpora- 
tions. 

92.  When  Corporate  Existence  Commences.  The  states  gen- 
erally provide  by  statute,  for  the  organization  of  corporations.  At 
present,  corporations  seldom  are  created  by  special  grant  of  the 
legislatures.  Most  states,  by  constitutional  provisions,  limit  the  power 
of  the  legislatures  to  create  corporations  by  special  act.  Persons 
desiring  to  organize  a  corporation,  must  comply  with  the  general  laws 
regulating  their  formation.  As  was  pointed  out  in  the  section  on 
creation  of  corporations,  several  steps  must  be  taken  to  complete  the 
organization  of  a  corporation.  The  question  often  arises  as  to  when 
the  legal  existence  of  a  corporation  commences.  It  is  quite  generally 
held  that  a  corporation's  legal  existence  dates  from  the  filing  of  the 


COMMERCIAL  LAW  83 

articles  of  incorporation  with  the  designated  state  office.  After  that 
time  the  corporation  cannot  deny  its  legal  existence.  Neither  can 
third  persons  dealing  with  the  corporation  deny  the  legal  existence 
of  the  corporation.  If  the  corporation  fails  to  fulfil  the  remaining 
statutory  provisions  relating  to  the  completion  of  the  corporation, 
the  state,  through  its  officers,  may  revoke  the  corporation's  right  to 
continue  as  a  corporation.  A  corporation  does  not  have  the  right 
to  transact  business,  until  its  organization  is  completed.  It  may  have 
a  legal  existence  before  that  time. 

93.  Estoppel  from  Denying  Corporate  Existence.  An  asso- 
ciation of  persons  pretending,  innocently  or  otherwise,  to  be  a  cor- 
poration, not  having  complied  with  the  legal  requirements  for  creating 
a  corporation,  is  not  permitted  to  deny  its  corporate  existence,  for  the 
purpose  of  avoiding  its  obligations.  Such  an  association  is  liable 
as  a  corporation  for  its  obligations,  and  if  there  is  no  corporate 
property,  the  members  of  the  association  are  liable  personally. 

On  the  other  hand,  persons  who  deal  with  an  association  of 
persons  which  claims  either  by  name,  or  by  express  statement,  to 
be  a  corporation,  cannot  evade  their  liability  to  the  association  on 
the  ground  that  the  corporation  has  not  been  legally  organized. 

As  between  the  corporation  and  the  state,  which  alone  can  give 
it  power  to  exist  as  a  corporation,  no  valid  corporation  exists  until 
all  the  legal  requirements  are  complied  with.  The  state,  through  its 
proper  officers,  may  deny  corporate  right  to  any  association  of  per- 
sons who  have  not  fully  complied  with  the  statutes  regulating  the 
creation  of  corporations  To  create  a  corporation  by  estoppel,  there 
must  be  an  organization  assuming  to  act  as  a  corporation.  If  A 
trades  in  his  own  name,  a  person  dealing  with  him  cannot  claim 
that  -4  is  a  corporation  by  estoppel.  But  if  A  trades  as  "The  Cook 
County  Lumber  Co.,"  and  enters  into  a  contract  with  B  in  the  name 
of  The  Cook  County  Lumber  Co.,  and  signs  his  name  as  president 
of  the  company,  he  cannot  deny  its  corporate  existence.  If  B  pur- 
chases material  of  The  Cook  County  Lumber  Co.,  he  cannot  refuse 
to  pay  for  it  on  the  ground  that  The  Cook  County  Lumber  Co.,  is 
not  a  legally  incorporated  company. 

94.  Corporate  Charter  a  Contract.  Originally  in  this  country, 
the  right  to  exist  as  a  corporation  was  granted  by  special  act  of 
the  legislature.     It  was  early  decided  that  this  grant  by  a  legislature 


84  COMMERCIAL  LAW 

could  not  be  revoked  or  changed  by  subsequent  act  of  the  legislature. 
It  was  regarded  as  a  contract.  By  reason  of  the  fact  that  corporate 
charters  are  contracts,  giving  corporations  the  right  to  a  continuous 
existence  under  the  terms  of  the  original  grant,  many  states  now  have 
constitutional  provisions,  limiting  the  right  of  legislatures  to  grant 
irrevocable  charters.  Those  states  having  no  such  constitutional 
limitations,  have  a  provision  in  their  statutes  authorizing  the  creation 
of  corporations,  and  providing  that  all  corporate  charters  or  franchises 
be  revocable  or  changeable  at  the  will  of  the  legislature.  At  the 
present  time  in  most,  if  not  all  of  the  states,  a  corporation  cannot 
obtain  an  irrevocable  charter.  Their  charters  are  granted  with  the 
reservation,  or  upon  the  condition,  that  the  terms  may  be  changed 
or  revoked  at  any  time. 

95.  De  Facto  Corporations.  In  connection  with  corpora- 
tions, the  terms  de  facto  and  de  jure  are  often  used.  By  de  jure  cor- 
poration is  meant  a  corporation  that  has  a  perfectly  legal  existence; 
one  that  has  complied  with  all  the  laws  relating  to  its  creation;  one 
that  cannot  have  its  right  to  exist  as  a  corporation  denied  by  the  state 
under  whose  laws  it  was  created,  on  the  ground  that  it  has  not  com- 
plied with  all  the  laws  relating  to  its  creation.  By  de  jacto  corpora- 
tion is  meant  a  corporation  that  has  performed  some  of  the  functions 
of  a  corporation  without  having  complied  with  all  the  legal  require- 
ments relating  to  its  incorporation.  "^  To  constitute  a  corporation 
de  jacto,  it  is  usually  conceded  that  there  must  have  been  laws  under 
which  the  pretended  corporation  might  lawfully  have  been  organized, 
followed  by  some  kind  of  an  attempt  to  organize  under  these  laws, 
and  by  a  use  of  corporate  functions.  As  between  the  corporation 
and  the  state,  the  state  may  stop  the  corporation  from  exercising 
corporate  functions.  As  between  the  corporation  and  third  persons 
dealing  with  it  as  such,  in  the  absence  of  fraud,  corporate  existence 
of  a  de  jacto  corporation  cannot  be  denied. 

96.  Promoters.  Persons  who  undertake  the  organization  of 
corporations  are  called  promoters.  The  promoter  of  a  corporation 
need  not  be  one  of  the  incorporators,  but  he  is  the  active  man  who 
engineers  the  enterprise.  He  is  the  one  who  interests  capital,  who 
induces  persons  to  take  the  required  amount  of  stock,  who  assembles 
the  parties  desiring  or  induced  to  organize  the  corjioration.  In 
short,  he  is  the  one  who  manages  the  organizing  and  starting  of  the 


COMIVrERCIAL  LAW  S.'5 

corporation.  Oftimes  much  work  must  be  done,  many  contracts 
made,  and  liabilities  incurred  before  a  corporation  has  any  legal 
existence.  Just  what  connection  the  promoter  has  with  the  corpora- 
tion, whether  he  may  bind  the  future  corporation,  or  make  it  liable 
for  his  acts  of  necessity,  or  by  adoption,  is  often  a  close  question. 
It  must  be  borne  in  mind  that  before  a  corporation  has  a  legal  exist- 
ence, it  can  incur  no  obligations  as  a  corporation.  Before  a  corpora- 
tion's legal  existence  commences  it  can  have  no  authorized  agents. 
If  A,  knowing  where  valuable  undeveloped  stone  quarries  are  located, 
obtains  options  on  the  lands,  interests  men  of  means  to  promise  to 
take  stock  in  a  future  organization,  performs  all  the  preliminary 
work  to  the  creation  of  a  corporation,  organized  for  the  purpose  of 
purchasing  and  operating  said  lands,  and  incurs  debts  in  connection 
therewith  in  the  name  of  the  proposed  company,  the  corporation, 
when  completed,  cannot  be  compelled  to  pay  such  obligations.  It 
did  not  incur  them.  It  had  no  power  to  incur  them  since  its  legal 
existence  did  not  commence  until  a  subsequent  time.  The  obliga- 
tion belongs  to  the  promoter,  or  to  those  persons,  if  any,  who  author- 
ized him  to  incur  the  debts.  If,  however,  recurring  to  the  former 
example,  "The  Cuyahoga  Stone  Co.,"  is  organized  by  A  to  develop 
and  operate  such  stone  lands,  and  after  the  organization  is  com- 
pleted with  full  knowledge  of  the  obligations  of  A,  it,  as  a  corporation, 
agrees  to  pay  said  obligations,  and  to  purchase  A's  options  on  the 
lands  for  a  specified  amount,  the  obligations  now  become  the  obliga- 
tions of  the  corporation.  The  corporation  may  be  sued  thereon, 
and  its  property  subjected.  This  is  called  the  adoption  of  a  promo- 
ter's obligation  by  a  corporation. 

A  corporation  is  liable  on  its  express,  as  well  as  on  its  implied 
contracts,  and  if  it  accepts  valuable  services  of  a  promoter  after  it 
becomes  a  corporation,  it  is  liable  on  an  implied  contract  to  pay  for 
the  same.  Services  rendered  by  a  promoter  for  a  future  corporation 
do  not  render  a  corporation  liable  therefor,  unless  adopted  by  the 
corporation  after  its  legal  existence  commences.  The  states  gen- 
erally provide  by  statute,  the  time  when  a  corporation's  existence 
commences.  These  statutes  vary  somewhat,  but  in  general  provide 
that  the  corporation's  existence  commences  when  the  proper  articles 
of  incorporation  are  filed  with  the  Secretary  of  State. 

97.     Reorganization  of  Corporations.    The    right  to  exist  as 


S6  COMMERCIAL  LAW 

a  corporation  is  a  special  privilege  which  cannot  be  sold  or  transferred 
to  another.  Any  property  acquired  by  a  corporation  may  be  mort- 
gaged, sold  or  transferred  at  the  will  of  the  corporation.  The  right 
to  exist  as  a  corporation,  however,  is  a  special  privilege  granted  by 
the  state,  and  cannot  be  transferred.  Any  association  of  persons 
desiring  to  exercise  the  rights  and  privileges  of  a  corporation  must 
obtain  such  rights  from  the  state.  They  cannot  purchase  such  a 
right  from  an  existing  corporation.  Many  of  the  states  provide  by 
statute  for  the  organization  of  a  corporation  by  those  persons  pur- 
chasing the  property  of  public  service  corporations  at  a  foreclosure 
sale.  A  common  example  is  in  case  of  a  foreclosure  of  a  mort- 
gage on  a  railway.  Statutes  of  some  states  provide  that  the  pur- 
chasers of  such  property  at  foreclosure  sale  may,  and  shall  organize 
a  corporation  which  shall  carry  out  the  purposes  of  the  original  cor- 
poration. 

Where  a  corporation  is  organized  and  purchases  the  assets  of 
the  former  corporation,  the  new  corporation  is  not  liable  for  the 
obligations  of  the  old.  Sometimes  the  new  corporation  takes  over 
the  assets  of  the  old  corporation,  and  expressly  assumes  the  obli- 
gations of  the  old.  In  this  event,  the  new  corporation  is  liable  for  its 
predecessor's  debts.  If  the  new  corporation,  in  purchasing  the  assets 
of  the  old,  uses  unfair  or  fraudulent  methods,  the  transfer  will  be 
set  aside  at  the  instance  of  creditors  of  the  old  corporation,  or  the 
new  corporation  will  be  deemed  liable  for  the  debts  of  the  old  cor- 
poration. In  carrying  out  reorganization  schemes,  a  transfer  of 
assets  must  be  fair  and  bona  fide,  or  the  sale  will  either  be  set  aside 
as  fraudulent,  or  the  new  organization  will  bf  deemed  a  continuation 
of  the  old,  and  liable  for  its  debts. 

98.  Consolidation  of  Corporations.  The  right  to  exist  as  a 
corporation  does  not  carry  with  it  the  right  to  combine  or  consolidate 
with  other  corporations.  Where  two  or  more  corporations  combine 
or  consolidate,  the  resulting  corporation  is  distinct  from  the  combin- 
ing corporations.  The  right  to  consolidate,  like  the  right  to  exist 
as  a  corporation,  is  a  special  privilege  granted  by  the  state.  Con- 
sent must  be  obtained  from  the  state  before  a  valid  consolidation 
can  be  made.  Most  states  provide  by  statute  for  the  consolidation 
of  certain  corporations  under  certain  prescribed  conditions.  Before 
a  valid  consolidation  can  be  effected,  the  provisions  of  these  statutes 


COMMERCIAL  LAW  87 

must  be  complied  with.  Some  states  require  the  payment  of  a  con- 
soUdation  tax.  Others  require  that  parallel  and  competing  rail- 
roads cannot  consolidate. 

Unless  the  charter  of  the  corporation  permits  of  consolidation 
without  the  consent  of  all  the  shareholders,  and  unless  the  share- 
holders have  by  valid  resolution  given  the  directors  the  right  to  con- 
solidate, a  consolidation  cannot  be  made  over  the  objection  of  any 
shareholder.  An  attempted  consolidation  under  these  circum- 
stances may  be  enjoined  by  a  dissenting  stockliolder,  or  if  the  con- 
solidation is  made  over  his  objection  the  resulting  consolidated  com- 
pany is  liable  in  damages  to  him. 

When  a  consolidation  has  been  legally  made,  the  consolidated 
company  is  liable  for  the  debts,  and  is  entitled  to  the  assets  of  the 
component  corporations. 

99.  Meetings  and  Elections  of  Corporations.  A  corporation 
transacts  its  business  through  a  board  of  managers.  The  share- 
holders or  members  of  the  corporation  do  not  transact  the  business 
of  the  corporation  directly,  but  through  the  governing  board.  In 
case  of  a  corporation  having  a  capital  stock,  this  governing  board  is 
called  the  board  of  directors.  In  case  the  corporation  has  no  capital 
stock,  such  as  a  church  or  charitable  organization,  the  governing 
board  is  called  the  board  of  trustees.  The  charter,  or  statute  under 
which  corporations  are  formed,  usually  provides  for  annual  meetings 
for  the  election  of  officers.  If  the  corporation  has  no  fixed  place  of 
meeting,  notice  must  be  given  each  stockholder  of  the  place  of  such 
meeting.  A  corporation  has  no  power  to  hold  its  meetings  outside 
the  state  of  its  organization.  It  may  employ  agents  to  represent  the 
corporation  outside  the  state  of  its  creation,  but  it  should  hold  its 
corporate  meetings  within  the  state.  If  the  time  of  holding  the 
election  of  officers  is  fixed  by  statute,  or  by  a  regulation  or  by-laws 
of  the  corporation,  the  meeting  should  be  held  at  that  time.  If  for 
any  reason  a  corporate  election  cannot,  or  is  not  held  at  the  time 
designated,  the  old  directors  hold  over  until  the  new  board  is  regu- 
larly elected. 

100.  Voting  at  Corporate  Meetings,  Quorum  and  Proxy. 
Each  shareholder  or  stockholder  of  a  corporation  is  entitled  to  vote 
at  the  corporate  meeting  for  the  election  of  officers.  Usually  the 
vote  is  by  shares.     Each  shareholder  is  entitled  to  one  vote  for  each 


S8  COMMERCIAL  LAW 

share  he  holds.  Some  states,  by  statute,  limit  the  right  of  a  single 
shareholder  to  a  certain  number  of  votes.  \\T.ien  this  limitation  is 
fixed,  it  usually  limits  the  shareholders  to  one  vote  regardless  of  the 
number  of  shares  held.  Such  a  limitation,  where  found,  is  for  the 
protection  of  small  shareholders.  Corporations  keep  books  in 
which  are  kept  the  names  of  the  shareholders.  Only  the  persons 
whose  names  appear  upon  the  corporation's  book  as  shareholders 
are  entitled  to  vote. 

Some  states  provide  by  statute  for  what  is  known  as  cumulative 
voting.  Instead  of  voting  the  number  of  shares  he  owns  for  each 
director,  by  cumulative  voting  a  stockholder  is  entitled  to  vote  for  one 
director  the  number  of  shares  he  owns,  multiplied  by  the  number  of 
directors  to  be  elected.  This  is  sometimes  called  ticket  voting.  For 
example,  three  directors  are  to  be  elected,  and  a  shareholder  holds  ten 
shares.  He  may  have  ten  votes  for  each  director,  or  thirty  votes  for 
one  director.     This  is  for  the  protection  of  the  small  shareholder. 

By  quorum  is  meant  the  number  of  votes  required  to  constitute 
an  election.  Sometimes  a  quorum  is  based  upon  a  majority  of  the 
number  of  shareholders  present.  In  the  absence  of  statute  or  cor- 
porate regulations  to  the  contrary,  this  rule  applies.  Statutes  of 
some  states  provide  that  a  two  thirds  majority  of  the  shares  of  the 
corporation  shall  constitute  a  quorum. 

Most  states  provide  by  statute  for  voting  by  proxy.  This  en- 
titles one  shareholder  to  give  another  written  authority  to  vote  his 
shares  at  a  corporate  meeting.  This  right  does  not  exist  in  the  ab- 
sence of  statute.  A  proxy  may  be  revoked  at  the  will  of  the  share- 
holder giving  it. 

101.  Stockholders  of  a  Corporation.  The  membership  of  a 
corporation  is  made  up  of  the  stockholders  or  shareholders.  A  cor- 
poration for  profit  is  authorized  by  its  charter  to  have  a  certain  capi- 
talization, or  the  capitalization  is  the  total  amount  of  the  shares 
authorized  to  be  issued.  The  charter  usually  requires  that  a  certain 
percentage  of  shares  subscribed  be  paid  in  before  the  corporation  is 
authorized  to  elect  directors.  The  charter  usually  provides  that  at 
least  ten  per  cent  of  the  capitalization  be  subscribed,  and  at  least 
ten  per  cent  of  the  amount  subscribed  be  paid  in,  before  directors 
can  be  elected.  A  stockholder  is  liable  to  the  corporation  on  his 
subscription  and,  in  the  absence  of  any  additional  liability  fixed  by 


COMIVIERCIAL  LAW  .SD 

the  charter,  is  not  liable  for  the  debts  of  the  corporation  for  any  amount 
in  addition.  Formerly  some  of  the  states  provided  by  statute  for 
double  liability  of  stockholders.  In  case  of  insolvency  of  the  corpora- 
tion, stockholders  could  be  required  to  contribute  an  amount  equal 
to  their  subscription  in  addition  to  paying  their  subscription  in  full. 
Stockholders'  double  liability  has  been  abolished  by  most  states. 
At  present  a  stockholder  can  be  compelled  to  pay  the  full  amount 
of  his  stock  subscription,  and  no  more. 

Stockholders  of  national  banks,  corporations  organized  under 
United  States  laws,  are  liable  for  double  the  amount  of  their  stock. 
Those  persons  are  regarded  as  stockholders  who  appear  as  such  on 
the  books  of  the  company.  A  person  may  become  a  stockholder  by 
purchasing  stock  from  the  corporation,  or  by  purchasing  it  from  an- 
other stockholder.  Any  person  legally  competent  to  contract  may 
become  a  stockholder. 

102.  Certificate  of  Stock.  Written  certificates  are  usually 
furnished  shareholders,  by  corporations,  as  evidence  of  membership. 
These  certificates  are  made  transferable,  in  order  that  they  may  be 
indorsed  by  a  shareholder,  and  made  payable  to  a  purchaser.  When 
so  indorsed,  the  purchaser  is  entitled  to  have  the  shares  transferred 
on  the  books  of  the  company,  showing  that  he  is  a  shareholder  in  the 
company.  A  certificate  of  stock  does  not  of  itself  constitute  owner- 
ship. It  is  merely  evidence  of  ownership.  A  person  may  be  a  stock- 
holder in  a  corporation  by  making  a  valid  subscription,  and  by  paying 
for  the  same,  regardless  of  having  received  a  certificate  of  stock. 
The  following  is  a  common  form  of  stock  certificate: 

The  Consolidated  Tack  Co. 
Cleveland,  Ohio. 
Incorporated  under  the  laws  of  the  state  of  Ohio. 
No.  99  No.  of  shares  -15- 

Capital  stock  $1,000,000.00 
This  certifies  that  John  Smith  is  the  owner  of  fifteen  shares  of 
$100  each  of  the  capital  stock  of  The  Consolidated  Tack  Co.,  trans- 
ferable only  on  the  books  of  the  company,  in  person  or  by  at- 
torney, upon  surrender  of  this  certificate  properly  indorsed.  In 
witness  whereof  said  corporation  has  caused  this  certificate  to  be 
signed  by  its  duly  authorized  officers,  and  to  be  sealed  with  the 
seal  of  the  corporation. 

At  Cleveland,  Ohio,  this  1st  day  of  October,  A.  D.  1909. 
Jack  Brown,  Tom  Jenkins, 

Treasurer.  President. 

Corporate 
Seal. 


90  COMMERCIAL  LAW 

Blank  for  transfer,  on  back  of  certificate. 

For  value   received    hereby  sell,  assign  and 

transfer  unto , shares  of  the  capital  stock  repre- 
sented by  the  within  certificate,  and  do  hereby  irrevocably  con- 
stitute and  appoint to  transfer  the  said  stock  on 

the  books  of  the  within  named  corporation. 
Dated 190.. 


In  the  presence  of 

103.  Directors  of  a  Corporation.  The  managing  officers  of  & 
corporation  are  called  directors.  They  are  the  representatives  elected 
by  the  stockholders,  or  members  of  the  corporation,  to  transact  the 
business  of  the  corporation.  While  in  the  absence  of  statutory  regu- 
lations a  director  need  not  be  a  stockholder,  practically  all  states 
require  directors  to  be  stockholders. 

Directors  are  authorized  to  act  as  agents  for  the  corporation  in 
the  management  of  the  corporation's  business.  Their  authority  is 
limited  not  only  by  the  charter  of  the  corporation,  but  by  the  regula- 
tions, and  by-laws  of  the  corporation  as  well.  The  directors  of  a 
corporation  are  not  authorized  by  virtue  of  their  office  to  dispose  of 
the  entire  assets  of  the  corporation,  neither  can  they  transfer  their 
right  to  act  as  directors  to  others.  They  have  the  right  to  purchase 
property,  to  sell  and  mortgage  assets  of  the  corporation  within  the 
limits  prescribed  by  the  charter,  regulations  and  by-laws  of  the  cor- 
poration. 

The  directors  of  a  corporation  must  act  as  a  board.  They  are 
not  permitted  to  act  by  proxy.  The  majority  of  the  entire  number 
of  directors  constitutes  a  quorum  for  the  purpose  of  doing  business. 
They  may  employ  agents  to  make  and  carry  out  contracts,  and  per- 
form ministerial  acts  of  the  corporation,  but  cannot  delegate  their 
discretionary  powers  as  directors.  Unless  provided  otherwise  by 
statute,  directors  must  hold  their  meetings  within  the  state  under 
whose  laws  the  corporation  is  created.  Notice  of  the  meeting  giving 
the  place,  time  and  purpose  must  be  given  to  all  the  directors  before 
a  valid  meeting  can  be  held.  Directors,  like  agents,  cannot  act  for 
their  own  private  interests  if  opposed  to  those  of  their  corporation. 
Directors  who  privately  profit  to  the  disadvantage  of  the  corporation 
are  liable  in  damages  for  such  acts  to  the  corporation.     It  is  generally 


COMMERCIAL  LAW  01 

conceded  that  a  director  may  contract  with  his  corporation,  if  no 
fraud  is  used,  and  if  a  quorum  of  directors  without  him  consents. 
Directors  are  liable  to  the  corporation  for  their  dishonesty  or 
negligence. 

104.  By=Laws,  Rules  and  Regulations  of  a  Corporation.  The 
by-laws  of  a  corporation  are  the  rules  and  regulations  by  which  the 
corporation  is  governed.  Sometimes  a  distinction  is  drawn  between 
the  term  hy-law,  and  the  term  regulation.  For  example,  the  statutes 
of  some  states  provide  that  the  stockholders  may  pass  regulations  for 
the  government  of  the  corporation  relating  to  the  time,  place  and 
manner  of  holding  corporate  meetings,  the  number  of  stockliolders 
that  shall  constitute  a  quorum,  the  time  and  manner  of  electing 
directors,  the  duties  and  compensation  of  oflBcers,  and  the  qualifica- 
tion of  officers;  while  the  directors  have  the  power  to  pass  by-laws 
relating  to  the  government  of  the  corporation,  not  inconsistent  with 
the  charter  of  the  corporation  and  the  regulations.  This  distinction 
between  regulations  and  by-laws  does  not  seem  to  be  generally  recog- 
nized. The  entire  government  of  the  corporation  is  generally  in- 
cluded in  the  term  by-laws.  If  the  charter  does  not  provide  other- 
wise, the  by-laws  shall  be  passed  by  the  stockholders  rather  than  by 
the  board  of  directors. 

A  resolution  is  not  a  by-law.  By  resolution  is  meant  the  re- 
corded and  legally  passed  determination  of  a  corporation  to  perform 
some  particular  thing  or  item  of  business.  A  vote  of  a  board  of 
directors  to  make  certain  bids  on  certain  contracts  is  an  example  of 
a  resolution.  By-laws  must  not  be  contrary  to  the  corporation's 
charter,  or  to  general  law.  They  are  not  presumed  to  be  known  by 
third  persons,  but  if  third  persons  dealing  with  a  corporation  have 
actual  knowledge  of  them,  they  are  bound  by  notice  of  their  provi- 
sions. 

105.  Capital  Stock  of  Corporations.  The  capitalization  of  a 
corporation  is  the  aggregate  amount  of  stock  it  is  authorized  by  its 
charter  to  issue.  If  a  corporation  is  authorized  to  issue  one  hundred 
thousand  dollars  ($100,000.00)  of  stock,  it  is  said  to  be  capital- 
ized at  one  hundred  thousand  dollars  ($100,000.00).  This  does 
not  mean  that  the  corporation  has  property  worth  one  hundred  thou- 
sand dollars  ($100,000.00).  A  corporation  is  usually  authorized  to 
elect  directors  after  one  tenth  of  its  stock  has  been  subscribed,  and 


02  COMMERCIAL  LAW 

after  one  tenth  of  the  amount  subscrilx-d  is  paid  in.  Thus,  a  cor- 
poration capitaUzed  at  one  hundred  thousand  dollars  (S 100 ,000.00), 
may  elect  directors  and  start  business  with  only  one  thousand  dollars 
($1,000.00)  actually  paid  in.  The  term,  capital  stock  of  a  corpora- 
tion, is  used  in  many  different  ways.  It  is  commonly  used  to  desig- 
nate the  capitalization.  Sometimes  it  is  used  to  designate  the  amount 
actually  subscribed.  Strictly,  it  probably  means  the  money  actually 
paid  in  on  subscriptions.  A  corporation's  assets  may  be  far  in  excess 
of  its  capitalization,  or  far  below  its  capitalization.  It  may  have 
property  worth  five  hundred  thousand  dollars  ($500,000.00)  and  be 
capitalized  at  one  hundred  thousand  dollars  ($100,000.00)  more  or 
less,  or  it  may  be  capitalized  at  one  hundred  thousand  dollars 
($100,000.00)  and  have  no  assets. 

106.  Payment  of  Shares  of  Stock.  It  may  be  stated  as  a  general 
rule  that  a  corporation  has  no  authority  to  dispose  of  its  stock  for  less 
than  par  value.  If  a  corporation  is  solvent,  ordinarily  no  objection 
is  raised,  but  if  the  corporation  becomes  insolvent,  creditors  may  com- 
plain, and  force,  by  proper  legal  action,  the  shareholders  to  pay  the 
difference  between  the  face  value  of  their  stock  and  the  amount 
actually  paid. 

In  the  absence  of  a  statute  requiring  stock  subscriptions  to  be 
paid  in  cash,  there  is  nothing  to  prevent  a  corporation  from  accepting 
property  at  a  fair  valuation  in  payment  of  stock.  The  rule  is  usually 
stated  to  be,  that  shares  of  stock  must  be  paid  for  in  money  or  in 
money's  worth.  Shares  of  stock  may  be  paid  for  in  bona  fide  serv- 
ices. The  rule  by  which  purchasers  of  stock  are  compelled  to  pay 
the  full  par  value  either  in  money  or  money's  worth  applies  only  to 
those  who  purchase  direct  from  the  company,  or  who  purchase  from 
stockholders  with  notice  that  the  shares  have  not  been  fully  paid  for. 
If  the  certificates  of  stock  state  that  they  are  fully  paid  for  and  the 
purchaser  has  no  notice  otherwise,  or  if  the  purchaser  does  not  know 
that  the  stock  has  not  been  paid  for  in  full,  he  cannot  be  made  to 
suffer  for  the  act  of  the  corporation  in  unlawfully  issuing  the  stock. 
107.  Calls  and  Assessments.  An  assessment  may  be  defined 
to  be  a  levy  by  a  corporation  upon  a  shareholder  for  an  unpaid  portion 
of  his  stock  subcription;  a  call  is  a  notice  to  a  shareholder  of  an  assess- 
ment. Ordinarily,  assessments  may  be  made  by  call,  at  the  direction 
of  the  directors,  until  the  entire  par  value  of  subscriptions  are  paid 


CO]\IMERCIAL  LAW  03 

in  full.  Stock  cannot  be  assessed  beyond  its  par  value,  unless  so 
provided  for  by  the  corporate  charter,  or  unless  the  subscriber  so 
contracts. 

108.  Watered  Stock.  In  case  property  or  services  are  accepted 
in  payment  for  stock  at  an  inflated  valuation,  or  if  stock  is  issued  as 
fully  paid  up  when  it  is  not,  the  stock  is  said  to  be  watered.  For  ex- 
ample, if  yl,  a  promoter  of  a  corporation,  turns  over  options  to  the 
company,  actually  worth  one  thousand  dollars  (Si, 000 .00),  and  re- 
ceives stock  in  payment,  the  par  value  of  which  is  five  thousand  dollars 
($5,000.00),  the  stock  is  said  to  be  watered,  and  the  four  thousand 
dollars  ($4,000.00)  excess  valuation  is  said  to  represent  the  amount 
of  water  in  the  stock. 

109.  Increasing  or  Decreasing  Capitalization.  A  corporation 
has  no  power,  by  reason  of  being  a  corporation,  to  increase  or  de- 
crease its  capitalization.  The  states  generally  provide  by  statute 
for  the  increasing  or  decreasing  of  the  capitalization.  The  corporation 
must  comply  with  these  statutes,  before  its  capitalization  can  be 
changed.  In  case  the  capitalization  is  increased,  the  purchasers  of 
such  stock  are  subjected  to  pay  the  full  face  value  at  the  instance  of 
creditors,  the  same  as  purchasers  of  an  original  issue.  That  is,  if  a 
corporation  is  unable  to  pay  its  debts,  one  who  has  purchased  direct 
from  the  company,  shares  of  stock  upon  an  increased  capitalization, 
at  a  price  below  par,  may  be  compelled  by  creditors  to  pay  the  difl'er- 
ence  between  what  he  has  actually  paid  and  the  par  value.  In  case 
of  an  increase  of  capitalization,  the  present  stockholders,  in  the  ab- 
sence of  express  statutory  regulations  to  the  contrary,  are  entitled 
to  receive  the  increased  shares  in  proportion  to  their  holdings.  This 
is  usually  called  a  stock  dividend. 

1 10.  Common  and  Preferred  Stock.  Stock  of  a  corporation  may 
be  of  two  kinds,  common  and  preferred.  When  stock  is  issued  by  a 
corporation  without  any  agreement  to  pay  certain  dividends  out  of 
the  profits,  or  to  repay  the  original  stock  investments  if  the  corporation 
ceases  doing  business,  in  preference  to  other  stock,  it  is  called  common 
stock.  Corporations  are  sometimes  authorized  by  their  charters 
to  issue  what  is  called  "preferred  stock.  That  is,  the  corporation 
pledges  to  pay  a  certain  percent  of  its  profits,  as  dividends  to  the  pre- 
ferred stockholders,  before  paying  anything  to  common  stockholders. 
If  the  corporation  ceases  doing  business,  preferred  stockholders  are 


94  COMMERCIAL  LAW 

first  paid  the  amount  of  their  subscriptions,  and  if  any  balance  re- 
mains, it  is  paid  to  common  stockholders.  In  the  absence  of  statu- 
tory authority,  probably  an  existing  corporation  has  the  right  to  issue 
preferred  stock  by  the  unanimous  consent  of  all  the  common  stock- 
holders. This  is  commonly  done  for  the  purpose  of  raising  addi- 
tional funds. 

111.  Dividends.  Dividends  is  the  term  applied  to  the  money 
distributed  to  shareholders,  out  of  the  profits  of  a  corporation.  The 
directors  are  usually  empowered  to  declare  dividends.  A  stock- 
holder cannot  compel  the  corporation  to  pay  him  a  percentage  of  the 
profits  until  a  dividend  has  been  declared.  After  a  dividend  has 
been  declared,  it  is  regarded  as  a  debt  of  the  corporation  in  favor  of 
the  shareholder.  When  a  dividend  has  been  declared  at  the  dis- 
cretion of  the  board  of  directors,  the  preferred  stockholders  must  first 
be  paid  the  amount  of  their  preference,  and  the  balance  must  be  dis- 
tributed equally  between  the  common  stockholders.  No  partiality 
can  be  shown  stockholders.  They  must  be  treated  alike.  Dividends 
can  be  declared  only  out  of  the  profits,  except  when  a  corporation 
ceases  doing  business,  in  which  event  the  property  of  the  corporation, 
after  paying  liabilities,  is  distributed  as  dividends. 

1 12.  Certificates  of  Stock  not  Negotiable  Instruments.  A  cer- 
tificate of  stock  is  merely  evidence  that  the  holder  is  a  member  of 
the  corporation.  A  person  may  be  a  member  of  a  corporation,  and 
be  entitled  to  the  rights  of  a  stockholder,  without  having  a  certificate 
of  stock.  Certificates  are  convenient  as  evidence  of  membership. 
Transfers  of  stock  are  usually  made  by  filling  in  a  blank  on  the  back 
of  the  certificate  for  that  purpose,  by  which  the  owner  declares  the 
transfer  to  the  purchaser,  and  designates  the  purchaser,  or  someone, 
his  attorney  to  present  the  certificate  to  the  corporation,  to  have  the 
transfer  registered  on  the  books  of  the  company.  It  is  the  usual  custom 
to  surrender  certificates  to  the  purchaser.  A  corporation  has  a  right 
to  rely  upon  its  books,  and  if  a  person  wrongfully  or  fraudulently 
attempts  to  transfer  a  certificate  of  stock  which  he  does  not  own,  or 
has  no  right  to  transfer,  the  purchaser  takes  no  better  title  than  the 
seller  had.  In  this  particular,  certificates  of  stock  are  not  negotiable 
instruments.  Negotiable  instruments  are  good  for  value  in  the  hands 
of  innocent  purchasers,  who  purchase  before  the  instrument  is  due. 
As  between  the  parties  themselves,  a  transfer  of  a  certificate  of  stock 


COMMERCIAL  LAW  05 

is  good,  but  as  to  the  corporation  or  creditors  of  the  seller,  the  trans- 
fer is  not  effectual  until  recorded  on  the  books  of  the  corporation. 

113.  Individual  Liability  of  Stockholders  for  Debts  of  a  Cor= 
poration.  A  corporation  is  an  artificial  person  having  an  existence 
in  law,  separate  and  apart  from  that  of  its  members.  Its  profits  can- 
not be  divided  until  the  managing  agents  of  the  corporation  so  decree. 
Its  property  does  not  belong  to  the  members,  but  to  the  corporation 
itself.  At  one  time  some  states  provided  by  statute  for  double  liability 
of  stockholders.  In  case  a  corporation  was  unable  to  pay  its  debts, 
creditors  could  compel  stockholders  to  pay  to  the  corporation  an 
amount  equal  to  the  par  value  of  their  stock,  after  paying  the  full 
face ,  or  par  value  of  their  stock.  Statutes  providing  for  double 
liability  have  quite  generally  been  abrogated.  At  the  present  time, 
except  in  the  case  of  national  banks,  corporations  organized  under 
United  States  law,  few  states  provide  for  double  liability  of  stockholders. 
If  A  has  subscribed  for  ten  shares  of  stock,  the  par  value  of  each  share 
being  one  hundred  dollars  ($100.00),  and  pays  one-half  the  amount 
of  his  subscription  to  the  company,  in  case  of  insolvency  of  the  cor- 
poration, creditors  can  force  A  to  pay  the  balance  of  his  stock  sub- 
scription, or  five  hundred  dollars  ($500.00).  Even  though  not  in- 
solvent, the  corporation  can  collect  the  balance  of  five  hundred  dollars 
($500.00)  from  A  by  call  and  assessment,  and  can  enforce  collection 
by  suit.  A's  subscription  is  a  contract  between  himself,  and  the  cor- 
poration. Unlike  partners,  stockholders  are  not  personally  respon- 
sible for  the  debts  of  the  corporation  of  which  they  are  members.  In 
dealing  with  partnerships,  a  person  may  rely  upon  the  personal  finan- 
cial worth  of  the  individual  members  of  the  partnership.  The  prop- 
erty of  the  individual  members  may  be  subjected  to  pay  the  debts  of 
the  partnership.  But  in  case  of  a  party  dealing  with  a  corporation,  he 
cannot  rely  upon  the  personal  worth  or  responsibility  of  the  members 
of  the  corporation,  since  the  members  individually  are  not  liable  for 
the  corporation's  debts.  The  corporation  is  separate  and  distinct 
from  its  members,  and  when  the  assets  of  the  corporation  are  ex- 
hausted, the  property  of  the  individual  members  is  not  liable. 

114.  Officers  and  Agents  of  a  Corporation.  A  corporation  is 
an  artificial  person  which  must  necessarily  conduct  its  affairs  through 
agents.  The  managing  board  of  a  corporation  having  a  capital 
stock  is  usually  called  the  board  of  directors.     The  managing  board 


96  COMIMERCIAL  LAW 

of  a  corporation  having  no  capital  stock  is  usually  called  the  board 
of  trustees.  These  managing  boards  are  elected  by  the  members  of 
the  corporation.  In  case  the  corporation  is  one  organized  for  profit, 
the  members  are  called  stockholders  or  shareholders.  The  directors 
or  managing  board,  of  a  corporation  may  delegate  the  performance 
of  what  are  called  ministerial  duties.  They  may  appoint  officers 
and  agents  to  assist  them  in  the  performance  of  their  duties  of  a 
certain  character.  The  officers  of  a  corporation  elected  by  the 
directors  usually  consist  of  a  president,  vice-president,  secretary  and 
treasurer.  If  a  corporation's  business  transactions  are  limited,  prac- 
tically the  only  duty  of  the  president  is  to  preside  at  the  meeting  of 
the  board  of  directors.  If  the  affairs  of  the  corporation  are  many 
and  complicated,  the  president  is  usually  intrusted  with  many  duties. 
The  board  of  directors  meets  at  stated  times,  authorizes  and  passes 
on  certain  important  matters,  but  the  duty  of  carrying  them 
into  execution,  and  of  performing  the  routine  work,  falls  on  the 
president.  In  a  corporation  of  large  affairs,  the  president  may  pay 
ciirrent  bills,  make  purchases,  give  notes,  if  necessary,  make  sales 
and  give  and  take  mortgages  on  property.  He  is  often  given 
authority  to  act  as  general  manager  for  the  corporation.  In  this 
event,  he  may  perform  all  the  duties  connected  with  the  general  opera- 
tion of  the  business.  The  vice-president  has  authority  to  perform 
the  duties  of  the  president  during  his  absence  or  disability.  It  is 
the  duty  of  the  secretary  to  keep  the  records  of  the  corporation.  It 
is  the  duty  of  the  treasurer  to  take  care  of  the  funds  of  the  corpora- 
tion. The  officers  of  a  corporation  are  liable  to  the  corporation 
for  breach  of  trust.  They  are  personally  liable  to  third  persons  when 
they  exceed  their  authority.  A  corporation,  through  its  properly 
appointed  officers,  as  well  as  through  its  board  of  directors,  may  ap- 
point subordinate  agents  to  perform  work  for  the  corporation.  The 
corporation  is  responsible  for  the  acts  of  its  agent,  performed 
within  the  real  or  apparent  scope  of  the  agent's  authority. 

115.  Execution  of  Contracts  and  Negotiable  Instruments  by  a 
Corporation.  A  corporation  can  act  only  through  its  agents.  The 
agents  authorized  to  act  for  a  corporation  are  the  board  of  directors, 
the  officers  appointed  by  the  board,  or  the  officers.  A  corporation, 
as  one  of  its  powers,  has  the  right  to  use  a  common  seal.  While  a  cor- 
poration commonly  uses  its  seal  in  signing  written  instruments  of 


COMIVIERCIAL  LA^Y  07 

importance,  for  the  purpose  of  showing  authority  of  its  agents  to 
enter  into  such  contracts,  a  corporation  need  not  use  its  seal  except 
in  those  cases  when  it  is  necessary  that  a  natural  person  use  a  seal. 
A  corporation  usually  authorizes  its  officers  to  make  contracts.  A 
president  and  secretary,  acting  together,  have  the  right  to  make  con- 
tracts for  their  corporation,  by  reason  of  the  general  authority  con- 
ferred upon  them  by  the  board  of  directors.  The  proper  signature 
of  a  corporation  to  a  written  document  is  the  name  of  the  corporation, 
followed  by  the  signature  of  the  president  as  its  president,  and  by 
the  signature  of  the  secretary  as  its  secretary.  For  example,  if  the 
India  Rubber  Company  is  to  sign  a  contract,  the  proper  signature  is: 

The  India  Rubber  Co., 

By  John  Smith,  its  President. 
By  John  Jones,  its  Secretary. 

When  the  signature  must  be  acknowledged  before  an  officer 
authorized  to  administer  oaths,  before  it  will  be  received  for  record, 
as  in  the  case  of  a  deed,  the  officer  authorized  to  sign  the  name  of  the 
corporation  to  the  deed  may  make  the  acknowledgment. 

Negotiable  instruments,  such  as  promissory  notes,  drafts  and 
checks,  should  be  signed  with  the  corporate  name  by  the  proper  officer, 
as  its  officer.  It  is  held,  however,  that  by  custom,  a  cashier  of  a  bank 
may  make  and  indorse  negotiable  paper  in  his  own  name,  merely 
adding  the  designation  cashier  to  his  signature,  and  by  this  means 
make  the  paper  that  of  the  corporation,  and  not  incur  any  personal 
liability  therefor.  This  is  an  exception  to  the  general  rule.  Where 
a  person  signs  as  agent,  he  should  sign  the  name  of  his  principal,  by 
himself,  as  agent.  If  he  signs  his  own  name,  followed  by  the  word, 
agent,  or  'president,  or  whatever  his  office  may  be,  he  binds  himself 
personally,  and  not  his  principal. 

1 16.  Ultra  Vires  Acts.  A  corporation  by  its  charter  is  granted 
certain  privileges.  It  has  a  right  to  act  within  the  terms  of  its  charter, 
but  no  right  to  go  beyond  the  terms  of  its  charter.  If  it  performs 
acts  beyond  the  terms  of  its  charter  these  acts  are  said  to  be  ultra 
vires.  This  does  not  mean  that  all  the  acts  which  may  be  performed 
by  a  corporation  must  expressly  be  enumerated  in  its  charter.  Cor- 
porations are  created  for  certain  purposes.  They  are  permitted  to 
perform  all  the  acts  necessary,  and  incidental  to  the  purpose  of  their 
organization.     The  general  laws  under  which  a  corporation  is  created 


98  COMMERCIAL  LAW 

are  a  part  of  its  charter.  A  corporation  organized  to  do  a  general 
banking  business  has  no  authority  to  sign  bonds  as  surety  for  per- 
sons or  corporations.  Attempts  to  perform  such  acts  of  suretyship 
are  beyond  their  power,  and  are  ultra  vires.  Ultra  vires  acts  are  un- 
lawful, and  a  single  stockholder  may  prevent,  by  legal  action,  the 
officers  of  a  corporation  from  completing  an  ultra  vires  contract. 
Third  persons  are  deemed  to  have  notice  of  the  limitation  of  the  powers 
of  a  corporation.  They  are  not  permitted  to  act  in  such  a  manner 
as  to  benefit  by  ultra  vires  acts,  and  then  escape  liability  on  the  ground 
that  the  obligation  is  ultra  vires.  If  an  ultra  vires  contract  is  wholly 
executory  on  both  sides,  neither  party  can  enforce  it,  if  the  other 
party  complains  by  reason  thereof.  But  one  cannot  accept  benefits 
thereunder,  and  refuse  to  carry  out  the  contract  on  his  part.  He  is 
said  to  be  estopped  from  so  doing.  The  doctrine  laid  down  by  the 
last  statement  is  disputed  in  some  jurisdictions. 

117.  Rights  and  Liabilities  of  a  Foreign  Corporation.  Cor- 
porations have  no  rights,  as  such,  outside  of  the  jurisdiction  of  the 
power  creating  them.  A  corporation  organized  under  the  laws  of 
one  state  may  be  excluded  from  performing  any  of  its  corporate  func- 
tions in  another  state.  States  may  permit  foreign  corporations  to 
exercise  their  function  within  their  borders,  if  they  so  desire.  But 
states  cannot  be  compelled  to  recognize  the  corporate  rights  of  foreign 
corporations.  While  the  United  States  constitution  provides  that 
citizens  of  each  state  shall  be  entitled  to  all  the  privileges  and  im- 
munities of  citizens  of  the  several  states,  a  corporation  is  not  a  citizen 
within  the  meaning  of  this  provision.  The  United  States  Govern- 
ment may  employ  or  organize  corporations  to  carry  out  its  purposes. 
Such  corporations  cannot  be  denied  the  right  to  exercise  their  func- 
tions by  any  state.  For  example,  the  United  States  Constitution 
gives  Congress  the  right  to  regulate  commerce  with  foreign  nations, 
among  the  several  states,  and  with  the  Indian  tribes.  A  corporation 
engaged  in  interstate  commerce  cannot  be  excluded  by  any  state, 
in  the  exercise  of  this  function.  Outside  these  governmental  agencies, 
each  state  has  the  right  to  exclude  a  foreign  corporation  from  exer- 
cising any  of  its  corporate  functions  within  their  jurisdictions.  The 
states  generally  provide  by  statute  that  foreign  corporations  may  trans- 
act business  within  their  territory  by  filing  with  the  Secretary  of  State 
a  statement  of  their  capitalization,  the  amount  actually  paid  in,  the 


COMMERCIAL  LAW  99 

nature  of  their  business,  and  the  names  of  their  officers.  Then,  by 
paying  a  certain  tax,  they  are  permitted  to  maintain  an  office  and 
transact  business  within  the  state  thus  granting  them  the  privilege. 
The  statutes  of  the  various  states  regulating  foreign  corporations 
commonly  use  the  term,  "doing  business."  They  prohibit  foreign 
corporations  from  doing  business  within  their  borders  unless  they 
comply  with  their  statutes.  The  term,  "doing  business,"  has  been 
held  to  mean  the  maintaining  an  office  or  place  of  business,  or 
manufacturing  plant  within  a  state,  and  does  not  prohibit  a  foreign 
corporation  from  selling  goods  by  traveling  salesmen,  or  from  making 
or  suing  on  contracts. 

118.  Liability  of  a  Corporation  for  its  Torts  and  Crimes.  A 
corporation,  as  well  as  an  individual,  may  commit  torts  and  crimes. 
If  an  agent,  acting  within  the  scope  of  his  employment,  defrauds 
another,  the  corporation  is  liable  in  damages  for  his  act.  If,  however, 
an  officer  or  agent  goes  outside  his  employment,  and  commits  a  wrong, 
it  is  his  own  act,  and  he,  personally,  and  not  the  corporation,  is  liable. 
A  corporation,  as  well  as  an  individual,  may  commit  a  crime  for 
which  it  may  be  punished.  It  must,  of  course,  commit  the  crime 
through  its  officers  and  agents.  If  a  corporation  is  guilty  of  crim- 
inal negligence  in  failing  to  keep  its  works  in  repair,  and  persons  are 
injured  thereby,  it  is  subject  to  indictment  and  punishment.  If  a 
corporation  obstructs  navigation  or  breaks  the  Sabbath,  it  is  subject 
to  criminal  action.  The  usual  punishent  for  the  crime  of  a  cor- 
poration is  the  payment  of  a  fine,  but  the  officers  of  a  corporation 
may  be  imprisoned  as  well. 

119.  Dissolution  of  Corporations.  A  corporation  continues 
to  exist  indefinitely,  unless  the  period  of  its  existence  is  limited  by  its 
charter,  unless  its  charter  is  revoked  by  the  power  that  granted 
it,  or  unless  it  voluntarily  or  by  a  decree  of  court  ceases  business. 
A  corporation  may  forfeit  its  right  to  continue  as  a  corporation,  if  it 
abuses  its  privileges,  if  it  assumes  to  have  powers  and  rights  which 
it  does  not  have,  or  if  it  fails  to  exercise  its  corporate  functions.  The 
latter  is  called  non-user.  Most  states  provide  by  statute  that  corpora- 
tions shall  not  commence  business  until  a  certain  portion  of  its  capital 
has  been  raised.  If  the  corporation  violates  this  provision  or  any 
provision  of  the  statutes  regulating  the  completion  of  its  organiza- 
tion, its  franchise  may  be  revoked  by  the  state.     Most  states  provide 


100  COMMERCIAL  LAW 

by  statute,  a  means  by  which  a  corporation  may  wind  up  its  affairs. 
After  paying  its  liabilities  the  balance  of  its  assets  may  be  divided 
ratably  among  its  stockholders. 

NEGOTIABLE  INSTRUMENTS 

120.  In  General.  By  negotiable  instruments  are  meant  those 
written  instruments  intended  to  circulate  as  money,  which  by  their 
form  and  nature  are  transferred  by  delivery  or  by  indorsement  and 
delivery.  The  most  common  negotiable  instruments  are  promis- 
sory notes,  drafts  and  checks.  Negotiable  instruments  are  much 
more  commonly  and  extensively  used  than  money  in  the  transaction 
of  business.  Their  function  is  to  take  the  place  of  money.  Their 
use  arose  out  of  the  scarcity  of  currency  and  facilitates  the  trans- 
action of  business.  Their  form  and  nature  make  them  more  de- 
sirable and  practical  in  many  respects  than  money  itself.  Negotiable 
instruments  may  readily  be  traced.  They  may  be  drawn  in  any 
denomination  to  meet  any  emergency.  They  may  be  indorsed  in 
such  a  manner  that  only  the  person  intended  by  the  maker  to  receive 
payment  can  receive  payment  thereon.  Money,  on  the  other  hand, 
has  no  particular  identity.  After  payment  it  cannot  be  traced,  nor 
can  mistakes  in  amount  be  corrected.  If  lost,  payment  thereon  cannot 
be  stopped.  If  found  or  stolen,  its  possessor  may  receive  the  benefit 
of  it  without  question.  Negotiable  instruments  were  devised  to  meet 
a  broad  and  pressing  demand.  Usage  and  custom  have  given  them 
characteristics  to  meet  this  demand. 

121.  Negotiability.  Negotiability  is  the  power  of  a  written 
instrument  to  circulate  as  money.  To  be  negotiable,  an  instrument 
must  contain  language  of  negotiability.  The  common  phrases  of 
negotiability  are  Pay  to  the  order  oj,  or  Fay  to  hearer.  Any  draft, 
promissory  note,  check,  or  bill  of  exchange  containing  the  words, 
'pay  to  the  order  of,  or  pay  to  bearer  are  known  as  negotiable  instru- 
ments. If  a  negotiable  instrument  is  made  payable  to  bearer,  it  is 
transferable  by  delivery.  The  holder  of  it  may  pass  it  like  money  and 
the  taker  is  entitled  to  receive  payment  of  it  when  it  is  due.  A  nego- 
tiable instrument  payable  to  the  order  of  a  designated  person  is  pay- 
able upon  the  indorsement  and  delivery  of  the  person  to  whose  order 
it  is  made  payable.  For  example,  if  a  check  is  made  payable  to  the 
order  of  John  Smith,  and  John  Smith  desires  to  transfer  it  to  John 


COMMERCIAL  LAW  101 

Jones,  he  writes  his  name,  John  Smith,  on  the  back  of  the  check,  and 
dehvers  the  check  to  John  Jones.  By  this  act,  John  Jones  becomes 
the  owner  of  the  check,  and  may  in  turn  transfer  it,  or  cash  it  by  pre- 
senting it  to  the  bank  on  which  it  is  drawn.  If  a  check  is  made  pay- 
able to  John  Smith  or  bearer,  and  if  John  Smith  desires  to  transfer  It 
to  John  Jones,  he  merely  hands  John  Jones  the  check.  No  indorse- 
ment is  necessary. 

122.  Negotiability  Distinguished  from  Assignability.  An  or- 
dinary contract  or  obligation  not  requiring  personal  services  or  dis- 
cretion may  be  transferred  by  oral  or  written  contract  of  assignment. 
For  example,  if  B  purchases  a  barrel  of  flour  from  A,  his  grocer,  to 
be  paid  for  in  thirty  days,  A  may  assign  his  claim  against  B  to  C. 
This  may  be  accomplished  by  a  verbal  agreement  to  that  effect  be- 
tween A  and  C,  or  A  may  give  C  a  written  statement  to  the  effect 
that  he  has  transferred  his  claim  against  B  to  C.  AVhen  B  is  notified 
of  this  assignment,  he  is  obliged  to  pay  C  the  money.  If  for  any 
reason  the  flour  was  not  accepted  by  B,  or  If  B  has  a  claim  against  A, 
C  can  recover  from  B  only  the  amount  B  owes  A.  If  J5  owes  A  noth- 
ing, on  account  of  the  flour  being  of  poor  quality,  and  not  accepted 
for  that  reason,  or  if  B  has  a  claim  for  an  equal  amount  against  A, 
B  can  set  up  this  defense  against  C's  claim,  and  C  can  recover  from 
B  only  the  amount  that  A  could  have  recovered  against  B.  In  other 
words,  In  case  of  an  assignment,  all  defenses  that  were  good  against 
the  assignor  are  good  against  the  assignee.  In  case  of  negotiable 
instruments,  however,  the  transferee  who  takes  the  instrument  be- 
fore maturity  for  value,  and  without  notice  of  any  defenses,  has  the 
right  to  recover  the  full  face  value  from  the  maker,  regardless  of 
defenses  the  maker  may  have  against  the  original  payee.  In  case 
of  assignment,  notice  must  be  given  the  debtor  to  make  the  title  good 
in  the  purchaser.  In  case  of  negotiability,  no  notice  to  the  debtor 
is  necessary. 

A  negotiable  instrument  may  be  assigned.  A  common  example 
is  the  delivery  for  value,  of  an  instrument  payable  to  order  without 
indorsement.     The  purchaser  takes  only  the  rights  of  a  seller. 

123.  Law  Merchant.  The  law  relating  to  negotiable  instru- 
ments is  said  to  be  based  upon  the  Law  Merchant.  By  the  Law 
Merchant,  Is  meant  the  rules  and  customs  of  merchants  relating  to 
bills  and  notes.     At  an  early  time,  various  rules  were  recognized  by 


102  COMMERCIAL  LAW 

the  merchants  trading  between  different  countries.  Drafts  or  bills 
of  exchange  were  given  and  passed  current  as  money,  without  notice 
to  the  debtor  of  the  transfer.  As  early  as  the  year  1200,  these  customs 
of  merchants  were  recognized  in  England.  At  first,  they  were  recog- 
nized only  in  connection  with  foreign  bills  of  exchange.  By  foreign 
bills  of  exchange  are  meant  bills  made  or  drawn  by  persons  of  one 
country  to  be  paid  or  accepted  by  persons  of  another  state  or  country. 
Originally,  the  rules  were  recognized  by  merchants  only.  The  courts 
of  England  recognized  and  enforced  these  rules  in  actions  brought 
on  foreign  bills  of  exchange.  Gradually,  these  rules  were  recognized 
and  enforced  by  all  the  merchants  of  England.  They  were  applied 
to  inland  bills  as  well  as  to  foreign.  Some  statutes  were  passed, 
notably  one  making  the  rules  of  the  Law  Merchant  apply  to  promissory 
notes.  This  statute  compelled  the  general  recognition  of  the  Law 
Merchant.  Gradually  these  rules  were  applied  to  all  negotiable 
instruments  by  whomever  used.  The  customs  which  started  be- 
tween merchants  of  foreign  countries  were  held  applicable  to  all  per- 
sons, and  became  the  recognized  law  relating  to  negotiable  instru- 
ments. This  country  adopted  these  rules,  together  with  the  greater 
part  of  the  common  law  of  England.  At  the  present  time,  most  of 
the  states  have  negotiable  instrument  codes.  These  codes,  for  the 
most  part,  are  statutory  enactments  of  the  well  recognized  rules  of 
common  law. 

The  advantage  of  the  codes,  however,  is  to  settle  disputed  points 
by  express  statutory  enactment.  The  code  must  be  interpreted  by 
the  well  settled  and  recognized  principles  of  the  common  law.  The 
difference  between  the  contract  formed  by  negotiable  instruments 
and  ordinary  contracts  is  based  upon  the  Law  Merchant.  These 
customs  are  as  well  recognized,  and  are  as  much  a  part  of  the  law  as 
they  were  when  originally  used  by  the  merchants  of  the  old  world 
six  or  seven  hundred  years  ago. 

124.  Promissory  Notes.  One  of  the  most  common  forms  of 
negotiable  instruments  is  that  of  the  promissory  note.  A  common 
form  of  promissory  note  is  shown  in  Fig.  1. 

A  promissory  note  is  not  necessarily  a  negotiable  instrument. 
It  depends  upon  whether  it  contains  words  of  negotiability.  If  the 
note  contains  the  words,  or  order,  or,  or  bearer,  or  words  of  similar 
import,  it  is  a  negotiable  instrument      Otherwise  it  is  not.     To  con- 


COMMERCIAL  LAW 


103 


stitute  an  instrument  a  promissory  note,  it  must  contain  certain  ele- 
ments. It  must  be  signed  by  the  party  making  or  giving  it,  but  it  is 
not  necessary  that  the  signature  be  in  any  particular  place.  Any 
mark  or  designation  intended  as  a  signature,  or  by  which  the  maker 
can  be  identified,  regardless  of  its  position  on  the  paper,  is  a  suflBcient 
signature.  The  proper  and  usual  method  of  signing  negotiable  in- 
struments is  at  the  end  thereof. 


<f  /oo^^^ 


6^.;^^^-' 


-My^ 


M^  (^^t;^--i!'7^^?-ri.,e^l<><^^x^  /^^ 


C>J^^-^-^<^^igz>-t^g?<>^:^^^ 


mmmmmttnmrmmvmtmmttmmmwwwtnwunwm^mmmvmmimt* 


Fig.  1.  Promissory  Note. 

A  promissory  note  must  contain  an  unconditional  promise  to 
pay  a  definite  sum  of  money,  at  a  certain  time.  If  the  promise  to 
pay  is  conditional,  the  instrument  does  not  constitute  a  negotiable 
instrument.     The  following  instrument  was  sued  upon: 

Stratham,  March,  28,  1846. 
Due  to  order  of  Sophia  Gordon,  widow,  ten  thousand  dollars  to 
be  paid  as  wanted  for  her  support.  If  no  part  is  wanted  it  is  not 
to  be  paid. 

Stephen  Scanmore. 

Since  this  was  not  an  unconditional  promise  to  pay,  the  court 
held  it  not  to  be  a  promissory  note. 

The  time  of  payment  of  a  promissory  note  must  be  certain,  the 
amount  to  be  paid  must  be  specified,  and  the  instrument  must  be 
payable  in  money.  If  the  instrument  is  to  be  paid  in  anything 
other  than  money,  it  is  not  a  negotiable  instrument.  An  instru- 
ment must  be  delivered,  before  it  has  a  legal  existence  as  a  promis- 
sory note.  The  essentials  of  a  promissory  note  are  also  essentials  of 
any  negotiable  instrument.  A  promissory  note  need  not  be  dated, 
nor  need  it  state  that  it  is  given  for  a  consideration.  By  its  nature  it 
imports  a  consideration.     The  party  signing  the  note  is  called  the 


104 


COMMERCIAL  LA^Y 


maker,  the  })arty  to  whom  it  is  made  payable  is  called  the  payee.  If 
the  payee  transfers  it  by  indorsement,  he  is  called  the  indorser,  and 
the  person  to  whom  he  transfers  it  is  called  the  indorsee. 


ifr'-'-'^'-^'iHl^'--'-*-^'--^'-*---^'-^'-^'-^'-'-'-^'-'-'-'^'"^--^'-*-'-*-*-^^-'-'  ' "  •■■^■'■T.vv-iir»tJtarf^.t.w.T.-riV.-^^wwv«>.'.^->a.-Ji.'ai:aa'|< 


'JU^ 


^;lgI.^y.l»^^»|.«^^u<,«^u,^lJ^^|i^^<wu»l^'J^^lMM.^y.'^"^^H'y.'W'w«P'.|^.^l^'^^'»'l'^.'T>.^^ 


Fig.  2.    Sight  Draft. 

125.  Drafts  and  Bills  of  Exchange.  The  term,  draft,  is  com- 
monly used  to  designate  an  order  from  one  bank  or  banks  on  an- 
other, as  well  as  orders  on  third  persons.  Orders  drawn  by  one 
person  on  another,  payable  to  a  third  person,  are  known  technically 
as  bills  of  exchange.     At  present,  the  terms,  draji,  and  hills  oj  ex- 


'^^'.^'^■^•■.tn'fi^itaiVd^'-'-^'--^^^'-^^-^^-'^^-'^-^'^-'''^'-'-^ 


(^^^^^^/^j^^y,^  v^^5 


.^-^Ai^-c^^gZ^z^g  rf'^^'^'y^fr/i 


^<;2?Z«^<S^^ii;5i^2i(^}9?<5.<!^;^ZZ^^i»?<^^ 


T^^ 


,'^iM>H'W*W<''!».^WgJ.'»l.'»V^'»i.^^">'-^'t".^^<r'.'-5J.'W*^?>« 


Fig.  3.    Sixty-Day  Draft,  Accepted. 

change  are  generally  used  interchangeably.  A  draft  or  a  bill  of  ex- 
change is  a  written  order  drawn  by  one  person  on  another,  payable 
to  a  third  person,  to  the  order  of  a  third  person,  to  the  drawer  himself 
or  his  order,  or  to  bearer. 

A  common  form  of  draft  is  shown  in  Fig.  2. 

Bills  of  exchange  or  drafts  are  frequently  made  payable  at  a 


COMMERCIAL  LAW 


105 


time  considerably  in  the  future.  Fig.  3  is  a  form  of  sixty-day 
draft.  This  draft  is  presented  to  the  drawee,  J.  H.  Gotrochs,  and 
if  he  accepts,  he  writes,  accepted,  followed  by  his  name,  across  the 
draft.     His  name  written  on  a  draft  is  sufficient  acceptance. 

The  party  drawing  a  bill  of  exchange  is  called  the  drawer,  the 
party  on  whom  it  is  drawn  is  called,  the  drawee  before  accept- 
ance, and  the  acceptor  after  acceptance.  The  drawee  may  accept 
by  signing  the  instrument,  by  stating  his  acceptance  on  a  separate 
piece  of  paper,  by  oral  acceptance,  or  even  by  conduct  making  ap- 
parent his  intention  to  accept.  After  acceptance  of  a  draft  or  bill  of 
exchange,  the  acceptor  is  liable  to  pay  the  bill  according  to  its  terms. 
He  is  in  the  position  of  a  maker  of  a  promissory  note. 

126.  Checks.  A  check  is  an  order  drawn  on  a  bank  or  banker. 
It  differs  in  some  respects  from  an  ordinary  bill  of  exchange.     It 


Chicago,  ^^^/<?     190^    4j^. 


>^^ 


Fig.  4.    Certified  Check. 


does  not  have  to  be  presented  for  acceptance.  It  is  presented  for 
payment.  It  presupposes  funds  of  the  drawer  in  the  hands  of  the 
bank  or  banker  on  which  it  is  drawn.  It  is  payable  at  any  time  after 
the  date  fixed  for  maturity.  It  need  not  be  presented  at  maturity. 
The  maker  may  recover  damages  for  failure  to  present  promptly 
if  he  is  damaged  thereby.  For  example,  if  A  gives  B  his  check  on 
the  X  bank,  and  between  the  date  for  payment  of  the  check  and  the 
time  of  presentment  for  payment  by  B,  the  bank  fails,  A  may  recover 
as  damages  from  B,  the  amount  of  his  loss  by  reason  of  B's  failure 
to  present  the  check  promptly.  No  days  of  grace  are  allowed  in  the 
payment  of  checks.  In  this  particular,  they  differ  from  ordinary 
bills  of  exchange. 


lOf)  COMMERCIAL  LAW 

127.  Certification  of  Checks.  By  certification  of  a  check  is 
meant  a  written  acknowledgment  on  checks  by  an  officer  or  author- 
ized agent  of  the  bank  that  the  check  will  be  paid  when  presented. 
In  Fig.  4  is  shown  a  common  form  of  certification. 

The  words  accepted  or  certified,  written  on  a  check  by  an  author- 
ized officer  or  agent  of  a  bank  constitute  a  certification.  If  the  holder 
or  payee  has  it  certified,  he  elects  to  hold  the  bank,  and  thereby  re- 
leases the  maker  and  prior  indorsers.  If  the  maker  procures  the  cer- 
tification he  is  still  liable  thereon.  WTien  a  check  is  certified,  the  bank 
charges  it  to  the  account  of  the  maker,  and  it  then  becomes  a  debt  of 
the  bank,  regardless  of  whether  or  not  the  maker  has  funds  in  the  bank 
with  which  to  meet  it.  This  is  the  reason  that  a  maker  and  prior 
indorsers  of  a  check  are  released  from  liability  thereon  when  a  holder 
has  it  certified.  By  this  act,  the  holder  elects  to  rely  upon  the  bank, 
rather  than  upon  maker  or  indorsers, 

128.  Bonds.  Bonds  may  be  defined  to  be  the  promissory  notes 
of  corporations,  private  or  governmental.  They  are  made  under 
the  seal  of  the  corporation  issuing  them.  At  common  law,  a  seal 
destroyed  the  negotiability  of  an  instrument.  At  the  present  time 
this  is  not  true  of  bonds.  Private  corporations  often  secure  their 
bonds  by  a  mortgage  on  their  entire  property.  This  is  accomplished 
by  means  of  a  mortgage  called  a  trust  deed.  The  mortgage  is  given 
to  a  trust  company,  or  an  individual,  to  be  held  for  the  common  benefit 
of  all  the  bond  holders.  It  is  not  practicable  to  give  each  bond  holder 
a  mortgage.  This  would  be  inconvenient,  and  some  bond  holders 
could  obtain  preference  over  others.  But  one  trust  deed,  covering 
all  the  assets  held  by  a  trustee  for  the  benefit  of  all  the  bond  holders, 
accomplishes  the  purpose. 

Registered  bonds  are  registered  on  the  books  of  the  corporation 
issuing  them,  and  in  case  of  transfer  the  transfer  is  noted  on  the  books 
of  the  company.  Other  bonds  contain  coupons,  or  small  promissory 
notes  for  certain  amounts  representing  the  installments  of  interest 
payable  at  certain  times.  These  coupons  may  be  cut  from  the  bond 
and  sold  as  promissory  notes,  or  they  may  be  cut  at  maturity  and  re- 
turned for  payment. 


COMMERCIAL  LAW  107 


No.  1.  SIOOO.OO 

United  States  of  America, 
State  of  Ohio. 

Village  of  X,  Ohio,  Improvement  Bonds. 

Know  all  men  by  these  presents  that  the  village  of  X,  in  the  county 
of  Cuyahoga  and  state  of  Ohio,  acknowledges  itself  to  owe,  and  for  value 
received  hereby  promises  to  pay  to  bearer,  the  sum  of  $1000.00  in  law- 
ful money  of  the  United  States  of  America,  on  the  second  day  of  January, 
1920,  together  with  interest  thereon  at  the  rate  of  5%  per  annum  payable 
semi-annually  on  the  second  day  of  July,  and  second  day  of  January  of 
each  year,  as  evidenced  by  the  coupons  hereto  attached,  until  the  prin- 
cipal sum  is  paid.  Both  principal  and  interest  are  payable  at  the  City 
Trust  Co.,  Cleveland,  Ohio,  on  the  presentation  and  surrender  of  this 
bond,  and  the  coupons  hereto  attached  as  they  respectively  mature. 

This  bond  is  issued  for  the  purpose  of  improving  a  street  of  the 
village  of  X,  from  the  C.  B.  Railway  to  Rocky  River  by  constructing 
and  laying  water  mains  with  all  necessary  connections  thereon,  under 
and  by  authority  of  Sections  1536-281,  and  Sec.  2835  of  the  revised 
statutes  of  Ohio,  and  under  and  in  accordance  with  resolutions  of  the 
council  of  the  village  of  X,  Ohio,  adopted  Nov.  4,  1908,  and  Dec.  2,  1908. 

It  is  hereby  certified  that  all  proceedings  relating  to  this  bond  have 
been  in  strict  compliance  with  said  laws,  statutes  and  resolutions,  and  all 
other  statutes  and  laws  relating  thereto,  and  that  the  faith,  credit,  and 
revenues,  and  all  real  and  personal  property  in  the  village  of  X,  Ohio 
are  hereby  pledged  for  the  payment  of  principal  and  interest  hereof  at 
maturity. 

This  bond  is  one  of  a  series  of  bonds  of  like  date  and  effect,  but  of 
different  amounts  and  maturities  amounting  in  the  aggregate  to  S3700.00. 

In  witness  whereof,  the  village  of  X  has  caused  this  bond  to  be 
signed  by  the  mayor  and  clerk  of  said  village,  and  the  corporate  seal  of 
said  village  to  be  hereunto  affixed,  and  the  facsimile  signature  of  the 
mayor  and  clerk  of  said  village  to  be  affixed  to  the  attached  coupon  this 
second  day  of  January,  1909. 

D.  B.  X. 


Mayor. 


[Seal.] 

X.  Y.  Z 


Clerk. 


Form  of  Municipal  Coupon  Bond. 


ins 


rOMMERCIAI.  LAW 


On  the  second  day  of  July,  1909, 

On  the  second  day  of  January, 

the  village  of  X  promises  to  pay 

1910,  the  village  of  X  promises  to 

the  bearer  at  the  City  Trust  Co., 

pay  the  bearer  at  the  City  Trust 

Cleveland,  Ohio,  twenty-five  dol- 

Co., Cleveland,  Ohio,  twenty-five 

lars,  being  6  months'  interest  on 

dollars,  being  6  months'  interest 

its  bond. 

on  its  bond. 

No.  1  dated  Jan.  2,  1909. 

No.  2  dated  Jan.  2,  1909. 

D.  B.  X. 

D.  B.  X. 

Mayor. 

Mayor. 

X.  Y.  Z. 

X.  Y.  Z. 

Clerk. 

Clerk. 

On  the  second  day  of  July,  1910, 

On  the  second  day  of  January, 

the  village  of  X  promises  to  pay  the 

1911,  the  village  of  X  promises  to 

bearer    at    the    City    Trust    Co., 

pay  the  bearer  at  the  City  Trust 

Cleveland,  Ohio,  twenty-five  dol- 

Co., Cleveland,  Ohio,  twenty-five 

lars,  being  6  months'  interest  on  its 

dollars,  being  6  months'  interest 

bond. 

on  its  bond. 

No.  3  dated  Jan.  2,  1909. 

No.  4  dated  Jan.  2,  1909. 

D.  B.  X. 

D.  B.  X. 

Mayor. 

Mayor. 

X.  Y.  Z. 

X.  Y.  Z. 

Clerk. 

Clerk. 

Interest  Coupons  Attached  to  Municipal  Bond. 

Similar  coupons  follow  for  payment  at  Intervals  of  6  months  until  maturity  of  bond 
In  1920. 

129  Collateral  and  Judgment  Notes.  Banks  frequently  require 
borrowers  to  sign  collateral  notes.  These  instruments  are  promis- 
sory notes,  with  an  added  agreement  to  the  effect  that  certain  col- 
lateral security  is  given  the  payee  by  the  maker  as  security  for  the  note. 
Such  security  is  usually  certificates  of  stock,  bonds,  other  promissory 
notes,  or  chattel  property.  The  collateral  note  contains  a  stipulation 
that  upon  default,  the  payee  may  sell  the  collateral.  The  following 
is  a  common  form  of  collateral  note  used  by  banks : 

S5,000.00  Cleveland,  Ohio,  Dec.  26,  1908. 

Six  months  after  date,  I  promise  to  pay  to  the  order  of  the  Ficti- 
tious Bank  at  its  banking  rooms  in  Cleveland,  Ohio,  the  smn  of  Five 
thousand  dollars  for  value  received,  with  interest  at  the  rate  of  C% 
per  annum.  I  have  deposited  with  said  bank  as  collateral  security 
for  the  payment  of  this  note  the  following  property;  20  shares  of 
stock  of  the  Columbia  Sewing  Machine  Co.,  par  value  SIOO.OO  each,  2 
diamond  rings,  1  warehouse  receipt  of  the  City  Storage  Co.,  covering 


COMMERCIAL  LAW  109 

household  furniture  valued  at  $3,000.00.  The  value  of  this  property 
is  now  $5,600.00.  It  is  agreed  that  the  payee,  or  his  assigns,  may 
have  the  right  to  call  for  additional  security  at  any  time  it  considers  this 
collateral  security  insufficient,  and  on  failure  of  the  maker  of  this 
note  to  furnish  additional  security  to  satisfy  the  holder  of  this  note, 
the  note  may  be  deemed  payable  at  once  at  the  holder's  option.  The 
holder  shall  also  have  power  to  accept  substitutes  for  this  collateral. 
Should  the  maker  violate  any  of  the  conditions  of  this  note,  or  fail 
to  pay  it  when  due,  the  holder  shall  have  the  power  to  sell  the  collateral 
or  any  substitute  given  therefore,  at  private  or  public  sale,  at  any 
time  without  notice  to  anyone,  and  after  deducting  all  legal  expenses 
connected  with  the  sale,  and  after  paying  the  note,  shall  return  the 
balance  to  the  maker. 

(Signed) 

John  Smith. 

A  judgment  note  contains  a  provision  that  upon  default  of  pay- 
ment, any  attorney  at  law  may  appear  in  court  and  take  judgment 
thereon  by  presenting  the  note,  without  observing  the  formalities 
of  an  ordinary  suit  at  law.  This  kind  of  a  note  is  also  called  a  cognovit 
note.     The  following  is  a  common  form  of  judgment  note: 

$100.00  Boston,  Dec.  8,  1909. 

One  year  after  date,  I  promise  to  pay  to  the  order  of  John  Jones 
the  sum  of  one  hundred  dollars  with  interest  at  G%,  and  I  hereby 
authorize  any  attorney  at  law  in  the  United  States  to  appear  before 
any  Justice  of  the  Peace,  or  in  any  court  of  record,  after  this  note  is  due, 
and  waive  the  service  of  summons,  and  confess  judgment  against  me  in 
favor  of  the  holder  of  this  note  for  the  amount  which  shall  then  be  due 
and  unpaid  thereon,  together  with  interest  and  costs. 

(Signed) 

Thos.  Thomas. 

130.  Certificates  of  Deposit.  It  is  customary  for  banks  to 
issue  customer's  receipts  showing  that  a  deposit  of  a  certain  amount 
has  been  made  by  the  customer,  which  will  be  held  for  payment  of  the 
receipt  upon  presentation.  These  receipts  ordinarily  are  made  payable 
to  the  customer's  order,  and  circulate  like  money.  They  are,  in  effect, 
the  promissory  notes  of  the  bank  issuing  them.  They  differ  from 
promissory  notes  in  that  banks  require  a  special  deposit  of  its  cus- 
tomers before  issuing  them.  Banks  issuing  such  receipts  are  sup- 
posed to  hold  these  deposits  as  a  special  fund  with  which  to  pay  the 
certificate  when  presented.  The  following  is  a  common  form  of 
certificate  of  deposit: 


no  COMMERCIAL  LAW 

—THE  PEOPLES  BANK  OF  CHICAGO— 
We  hereby  certify  that  John  Jones  has  deposited   $1,000.00  in 
this  bank,  for  which  this  certificate  is  issued,  and  which  will  be  paid 
to  the  order  of  John  Jones  in  current  funds  of  this  bank  when  pre- 
sented. 

The  Peoples  Bank  of  Chicago, 
June  23,  1909.  By  A.  Z.  Marshall,  Cashier. 

The  payee  of  this  certificate  of  deposit  may  indorse  and  transfer 
it.  The  holder  may  collect  the  amount  by  presenting  the  certificate 
to  the  bank. 

13  L  Requisites  of  Negotiable  Instruments.  Certain  elements 
are  recognized,  by  long  usage,  as  being  necessary  to  constitute  an 
instrument  a  valid  negotiable  instrument.  The  instrument  must 
contain  words  of  negotiability,  such  as  or  hearer,  or  order,  or  words 
of  similar  meaning.  The  instrument  must  contain  a  specific  promise 
to  pay  a  certain  sum  of  money  at  a  definite  time.  The  instrument 
must  designate  an  ascertainable  person  to  whom,  or  to  whose  order 
the  money  is  payable.  The  instrument  must  be  signed  and  delivered. 
It  is  not  necessary  that  a  consideration  be  stated  in  the  instrument, 
although  in  a  suit  between  the  original  parties,  failure  of  consideration 
is  a  defense.  For  example,  if  A  gives  B  his  promissory  note  for  one 
hundred  dollars  ($100.00)  payable  to  B^s  order,  and  A  received  no 
benefit  for  giving  the  note,  if  B  sues  A  thereon,  A  may  plead  that 
he  received  no  consideration  for  the  note.  This  would  be  a  complete 
defense  to  A.  If,  however,  C  purchased  the  note  from  B  before  it  was 
due,  paying  value  for  same,  and  having  no  notice  of  its  being  given 
without  consideration,  A  could  be  compelled  to  pay  it  to  C  or  his 
successors.  It  is  not  necessary  that  a  negotiable  instrument  be  dated. 
It  is  proper,  however,  and  good  business  policy  to  date  all  negotiable 
instruments.  The  signature  need  not  be  at  the  bottom  of  the  instru- 
ment. This,  however,  is  the  proper  place  for  the  signature. 
I.  0.  U.  $500.00 

(Sigiied)  John  Jones,  is  not  a  promissory  note. 
It  is  not  a  promise  to  pay  at  a  definite  time  or  to  a  definite  person. 
It  is  a  mere  acknowledgment  of  indebtedness. 

132.  Parties  to  Negotiable  Instruments.  By  usage  and  custom, 
parties  to  negotiable  instruments  are  given  certain  well  recognized 
names.  The  name  of  the  party  to  whom  a  promissory  note  is  made 
payable  is  always   called  the  -payee.     A\Tien  the  payee  transfers  a 


COMIMERCIAL  LAW  111 

negotiable  instrument  by  indorsement,  he  is  called  the  indorser,  and 
the  party  to  whom  he  indorses  the  note  is  called  the  indorsee.  In- 
dorsers  and  indorsees  are  designated  as  first,  second,  third,  etc.,  in- 
dorsers  or  indorsees  according  to  their  position  on  the  instrument. 

The  maker  of  a  draft  is  called  the  drawer.  The  one  to  whom 
it  is  given  is  called  the  payee.  The  one  on  whom  it  is  drawn  is  called 
the  drawee.  After  acceptance,  the  drawee  is  called  the  acceptor. 
The  rights  and  liabilities  of  these  parties  are  discussed  under  separate 
sections. 

133.  Rights  and  Liabilities  of  a  Drawee.    The  term,  draft,  is 
sometimes  used  to  designate  orders  made  by  one  bank  on  another. 
For  example,  A  in  Cleveland,  purchased  of  his  Cleveland  bank  a 
New  York  draft,  or  an  order  by  the  Cleveland  bank  on  a  New  York 
bank,  payable  to  the  order  of  A.    Technically,  orders  on  persons  are 
bills  o/  exchange,  but  the  term  draft,  has  come  to  be  applied  both  to 
orders  of  one  bank  on  another  and  to  orders  of  one  person  on  an- 
other.    In  this  work  the  term,  drajt  is  applied  to  both  kinds  of  orders. 
A  drawer  is  a  person  who  makes  a  draft  on  another.     It  is  usually 
payable  to  the  order  of  a  third  person.     It  may  be  made  payable  to 
the  bearer  or  to  the  order  of  the  drawer,  himself.     A  drawer  enters 
into  a  conditional  contract.     By  becoming  a  drawer,  he  agrees  to 
pay  the  bill  of  exchange  or  draft,  if  the  payee  presents  it  without 
delay,  and   in   case  of  non-payment,  or  non-acceptance,  if  notice  is 
promptly  given  him  of  this  fact.     In  case  the  draft  is  a  foreign  one, 
that  is,  made  payable  or  to  be  accepted,  in  a  different  state  or  country 
from  which  it  is  drawn,  it  must  be  protested  by  the  payee  to  enable 
him  to  hold  the  drawer.     A  draft  is  protested  by  being  presented  by 
a  notary  public,  who,  by  formal  written  instrument,  declares  the  re- 
fusal of  the  drawee  to  accept.     Protest  is  discussed  more  at  length 
under  a  separate  section.      In  case  these  conditions  are  complied 
with,  and  the  drawee  does  not  accept  the  bill  or  pay  the  bill  after  ac- 
ceptance, the  payee  may  hold  the  drawer.     After  the  formalities 
above  enumerated  are  obscn-ed  by  the  payee  or  holders  of  a  draft, 
if  the  draft  is  dishonored,  that  is,  not  accepted,  or  paid  by  the  drawee, 
the  payee  may  sue  the  drawer,  whose  liability  is  similar  to  that  of  the 
maker  of  a  promissory  note. 

134.  Rights  and  Liabilities  of  Acceptor.    The  person  to  whom 
a  draft  is  directed  is  called  the  drawee  or  acceptor.     \ATien  a  draft 


112  COMMERCIAL  LAW 

is  presented  to  the  drawee,  he  may  accept  it  by  writing  accepted  there- 
on, or  he  may  accept  by  writing  his  consent  in  a  separate  instrument, 
such  as  a  letter,  or  by  sending  a  telegram,  or  he  may  accept  orally  or 
by  his  conduct.  After  a  drawee  has  accepted  a  draft,  he  is  bound  by 
its  terms.  He  must  pay  the  amount  mentioned  in  the  draft.  After 
acceptance,  his  liability  is  similar  to  that  of  the  maker  of  a  promissory 
note.  Sometimes  an  acceptor  does  not  accept  in  the  exact  terms  of 
the  draft.  He  may  change  the  time  or  place  of  payment,  or  attach 
conditions  to  the  bill  or  draft.  This  amounts  to  a  refusal  on  his  part 
to  accept  the  bill,  which  will  entitle  the  payee  to  refuse  the  qualified 
acceptance  and  by  giving  proper  notice  to  the  drawer  hold  the  drawer 
by  reason  of  non-acceptance  by  the  drawee.  If,  however,  the  payee 
chooses  to  accept  the  qualified  acceptance  of  the  drawee,  he  may  do 
so,  but  by  this  act  he  releases  the  drawer  and  all  prior  indorsers  from 
liability  thereon. 

135.  Rights  and  Liabilities  of  Maker.  Maker  is  the  term  ap- 
plied to  the  person  who  originally  makes  and  signs  a  promissory  note. 
By  this  act,  he  agrees  to  pay  at  maturity,  to  the  original  payee,  or  to 
whomever  the  note  has  been  indorsed  or  properly  transferred,  the 
amount  named  in  the  note.  The  maker  of  a  note  is  liable  absolutely 
and  unconditionally.  While  it  is  customary  for  the  holder  of  a  note 
to  present  it  to  the  maker  at  maturity  for  payment,  this  is  not  neces- 
sary unless  a  place  of  payment  is  stipulated  in  the  note.  The  holder 
may  commence  suit  against  the  maker  at  maturity  without  presenting 
the  note  for  payment.  If  the  note  contains  indorsements,  the  note 
must  be  presented  to  the  maker,  and  if  payment  is  refused,  to  enable 
the  holder  to  hold  the  indorsers  liable,  notice  of  the  fact  must  be 
given  the  indorsers.  If  the  note  is  payable  at  a  particular  place,  as 
for  example,  a  bank,  the  holder  must  present  the  note  at  the  bank  at 
maturity,  or  not  be  able  to  collect  interest  thereafter,  if  the  maker 
proves  that  he  had  funds  there  sufficient  to  pay  the  note  at  maturity. 
If  the  maker  has  been  damaged  other  than  by  loss  of  interest,  by  failure 
to  present  a  note  at  a  bank  when  made  payable,  he  may  collect  dam- 
ages therefor  from  the  holder. 

136.  Blank  Indorsement.  A  negotiable  instrument,  if  payable 
to  bearer,  may  be  transferred  by  delivery.  If  payable  to  the  order 
of  the  payee,  it  may  be  transferred  by  indorsement  and  delivery. 
By  indorsement  is  meant  the  writing  the  name  of  the  payee  upon 


COMINIERCIAL  LAW 


113 


the  back  of  the  negotiable  instrument.  Indorsement  may  be  made 
in  various  forms,  depending  upon  the  purpose  for  which  made,  and 
the  kind  of  Uability  the  indorser  is  wiUing  to  undertake,  or  the  kind 
or  degree  of  HabiHty  which  he  wishes  to  avoid.  The  most  common 
kind  of  indorsement  consists  of  the  payee's  writing  his  name  only 
on  the  back  of  the  instrument.  A  negotiable  instrument  with  blank 
indorsement  is  shown  in  Fig,  5. 


Pig.  5.    Promissory  Note  with  Blank  Indorsement. 

If  X.  X.  Crumby  desires  to  transfer  the  note  to  anyone,  he  signs 
his  name  on  the  back  thereof,  as  indicated  in  the  illustration.  This 
is  called  a  blank  indorsement,  and  makes  the  note  payable  to  bearer. 
The  note  now  passes  as  currency  without  further  indorsement. 
Subsequent  holders  may  indorse  the  note  if  they  so  desire,  or  are  so 
required.  If  the  back  of  a  negotiable  instrument  becomes  filled  with 
indorsements,  a  paper  may  be  attached  to  carry  further  indorsements. 
Such  a  paper  is  called  an  allonge. 


114 


COIVIMERCIAL  LAW 


137.  Indorsement  in  Full.  A  holder  of  a  negotiable  instru- 
ment, not  desiring  to  make  it  payable  to  bearer,  may  indorse  it  by 
making  it  payable  to  some  particular  person  or  to  the  order  of  some 
particular  person,  followed  by  his  signature.  This  does  not  destroy 
the  negotiability  of  the  instrument,  but  prevents  anyone  but  the 
person  to  whom  it  is  indorsed,  or  such  person's  indorsees,  from 
securing  payment  of  the  instrument.  This  is  not  true  if  the  instru- 
ment is  payable  to  bearer,  or  if  it  has  been  indorsed  in  blank.     Such 


Fig.  6.    One  Form  of  Indorsement 
in  Full. 


Fig.  7. 


Another  Form  of  Indorsement 
in  Full. 


instruments  are  payable  to  bearer,  and  circulate  as  money  without 
requiring  further  indorsement.  If  subsequently  indorsed  in  full, 
only  those  subsequent  holders  can  hold  the  indorser  in  full,  who  can 
trace  their  title  through  him. 


COMMERCIAL  LAW 


115 


Fig.  6  is  an  endorsement  in  full  of  X.  X.  Crumby.  By  this 
indorsement,  only  John  Jones,  the  person  to  whom  he  indorses,  may 
obtain  payment  of  the  note.  If  John  Jones  indorses  the  note  in 
blank,  that  is,  signs  his  name  to  it,  the  note  becomes  payable  to 
bearer,  and  passes  like  money,  without  further  indorsements. 

By  the  indorsement.  Fig.  7  which  is  also  an  indorsement  in 
full,  X.  X.  Crumby  becomes  liable  as  indorser  to  John  Jones  only, 
and  not  to  anyone  to  whom  John  Jones  may  indorse  the  paper. 
X.  X.  Crumby's  indorsement  does  not  contain  the  words  "or  order." 


Fig.  8.    Indorsement  without  Recourse. 


The  face  of  the  note,  however,  contains  the  words  "or  order," 
which  makes  the  note  negotiable.  X.  X.  Crumby's  indorsement  to 
John  Jones,  although  not  containing  words   of   negotiability,   does 


no 


COMMERCIAL  LAW 


not  destroy  the  negotiability  of  the  note.  John  Jones  may  indorse 
the  note  in  blank,  or  in  full.  The  only  efTect  of  X.  X.  Crumby's 
omitting  words  of  negotiability  from  his  indorsement  is  to  limit  his 
primary  liability  as  an  indorser  to  John  Jones. 

138.  Indorsement  without  Recourse.  Frequently,  the  holder 
of  a  negotiable  instrument  is  unwilling  to  assume  any  primary 
liability  by  transferring  a  negotiable  instrument  which  he  possesses. 


Fig.  9.    Indorsement  for  Collection  and  for  Deposit. 

He  may  desire  to  transfer  the  right  he  has  in  the  instrument,  without 
becoming  liable  thereon.  He  may  do  this  by  indorsing  it  without 
recourse. 

By  either  of  the  indorsements,  (Fig.  8)  the  one  in  blank,  or  the 
one  in  full,  Jos.  Rundy,  transfers  his  interest  in  the  note  to  John  Jones, 


COMMERCIAL  LAW  117 

and  does  not  become  liable  thereon  as  an  indorser.  It  is  not  quite 
accurate  to  say  that  an  indorser  without  recourse  has  no  liability  as 
an  indorser.  He  impliedly  warrants  the  signatures  preceding  his 
own  to  be  genuine,  and  that  the  parties  making  them  had  legal  capacity 
to  sign.  The  implied  liabilities  of  an  indorser  are  discussed  under  a 
separate  section. 


M^ '       _^ 


^« 


Fig.  10.    Promissory  Note  with  Anomalous  Indorser. 

139.  Indorsement  for  Collection  or  Deposit.  A  holder  of  a 
negotiable  instrument  may  transfer  it  for  the  purpose  of  collection, 
thereby  making  the  transferee  his  agent,  for  the  purpose  of  carrying 
out  his  will,  and  thereby  destroying  the  negotiability  of  the  instrument. 
This  prevents  another  from  taking  the  note  free  from  the  claim  of  the 
original  indorser. 

Either  of  the  indorsements  in  Fig.  9  destroys  the  further  negotia- 


118  COMMERCIAL  LAW 

bility  of  the  note.  The  indorsers  are  authorized  to  collect  the  note 
for  Arthur  Ilinde.  They  arc  not  authorized  to  transfer  the  note, 
except  for  the  purpose  of  collecting  it  for  Arthur  Ilinde. 

140.  Anomalous  Indorser.  Sometimes,  a  party  writes  his  name 
upon  the  back  of  a  negotiable  instrument  outside  the  chain  of  title. 
That  is,  he  writes  his  name  thereon,  before  the  payee  indorses  it.  This 
is  for  the  purpose  of  adding  security  to  the  note. 

In  this  case,  Fig.  10,  John  Arthur  signs  the  note  outside  the  chain  of 
title.  He  places  his  name  thereon  for  the  purpose  of  adding  security 
thereto.  He  is  liable  on  his  indorsement  to  the  'payee,  A.  Aldrich, 
and  to  the  indorsees  of  A.  Aldrich.  In  some  jurisdictions  he  is  liable 
as  a  guarantor,  in  some  as  a  surety,  but  in  most  as  an  ordinary  in- 
dorser. The  liability  of  a  surety  and  guarantor  is  discussed  in  the 
section  on  Suretyship. 

141.  Liability  of  an  Indorser.  By  placing  his  name  on  the 
back  of  a  negotiable  instrument  for  the  purpose  of  passing  title,  a 
person  becomes  liable  on  an  implied  contract.  If  his  indorsement  is 
in  blank,  or  payable  to  the  order  of  the  indorsee,  he  is  liable  to  any 
innocent  purchaser  for  the  value,  without  notice.  If  made  payable 
to  a  particular  person,  he  is  liable  only  to  that  person.  The  implied 
liability  of  an  indorser  has  been  said  to  be  as  follows:  "I  hereby  agree 
by  the  acceptance  by  you  of  title  to  this  paper,  and  the  value  you 
confer  upon  me  in  exchange,  to  pay  you,  or  any  of  your  successors 
in  title,  the  amount  of  this  instrument,  providing  you,  or  any  of  your 
successors  in  title,  present  this  note  to  the  maker  on  the  date  of 
maturity,  and  notify  me  without  delay  of  his  refusal  to  pay.  And  I 
warrant  that  all  the  parties  had  proper  capacity  and  authority  to  sign, 
and  that  the  obligation  is  binding  upon  each  of  them.  And  I  will 
respond  to  the  obligations  created  by  these  warranties,  even  though 
you  do  not  demand  payment  of  the  maker  at  maturity  or  notify  me 
of  default." 

142.  Forgery  and  Alteration  of  Negotiable  Instruments.  An 
act  by  which  a  negotiable  instrument  is  materially  and  fraudulently 
changed  and  passed  or  attempted  to  be  passed,  is  a  forgery.  The 
act  may  consist  of  fraudulently  writing  another's  name  on  a  negotiable 
instrument,  or  changing  a  name  already  on  a  negotiable  instrument, 
or  changing  the  figures,  date,  rate  of  interest,  or  in  fact  any  act  of 
counterfeiting  or  materially  altering  a  negotiable  instrument.    Forgery 


COMMERCIAL  LAW  110 

makes  the  instrument  void.  The  forger,  or  those  who  purchase  from 
him,  obtain  no  rights  against  the  party  wronged.  As  to  the  party 
whose  name  or  whose  instrument  is  forged,  the  instrument  is  void. 
For  example,  A  has  B's  valid  note  for  one  hundred  dollars  (SIOO.OO) 
and  changes  the  note  by  erasing  one  hundred  dollars  (SIOO.OO)  and 
substituting  five  hundred  dollars  ($500.00)  and  sells  the  note  to  C.  C 
can  recover  nothing  from  B.  A,  by  indorsing  the  note  to  C,  warrants 
the  genuineness  of  the  note  and  is  liable  on  his  indorsement  to  C. 
Neither  A  nor  C  can  recover  even  one  hundred  dollars  (SIOO.OO)  from 
B.  \  The  instrument  has  been  rendered  void  by  the  forgery,  and  courts 
will  recognize  no  liability  of  B  thereon. 

A  negotiable  instrument  altered  in  any  material  respect  is  void. 
If  jraudulently  made,  it  is  regarded  as  a  forgery.  If  innocently  made, 
the  instrument  is  still  void,  but  the  wronged  person  is  liable  for  the 
original  consideration.  If  A  gives  B  his  promissory  note  for  one  ' 
hundred  dollars  (SIOO.OO)  with  interest  at  6%,  and  B  carelessly,  but 
not  fraudulently,  writes  8%  thereon  instead  of  6%,  B  cannot  recover 
on  the  note  at  all.  But  he  can  recover  from  A  one  hundred  dollars 
(SIOO.OO)  with  interest  at  6%  on  the  debt  for  which  the  note  was  given. 
Any  alteration  of  a  negotiable  instrument  which  changes  the  liability 
of  the  parties  thereto,  amounts  to  a  material  alteration.  Changes 
in  the  rate  of  interest,  the  name  of  an  indorser,  the  date,  the  place, 
time  or  manner  of  payment  is  a  material  alteration  and  renders  the 
instrument  void.  If  the  alteration  is  made  by  a  stranger,  a  person 
not  a  party  to  the  instrument,  it  does  not  constitute  a  material  altera- 
tion. The  instrument  may  be  restored  to  its  proper  form  and  re- 
covery be  had  thereon. 

143.  Fraud  and  Duress.  Fraud  has  been  defined  to  be  "a 
false  representation  of  a  material  fact,  made  with  knowledge  of  its 
falsity  or  in  reckless  disregard  whether  it  be  true  or  false,  with  the 
intention  that  it  should  be  relied  upon  by  the  complaining  party, 
and  actually  inducing  him  to  rely  and  act  upon  it."  Fraud  is  a 
defense  to  a  party  to  a  negotiable  instrument  as  against  the  person 
inducing  it,  but  not  as  against  suljsequent  innocent  purchasers.  A  v 
offers  to  sell  B  a  diamond  ring  for  five  hundred  dollars  ($500,00) 
assuring  him  that  the  diamond  is  genuine.  Relying  upon  this  false 
statement  of  A,  B  takes  the  ring  and  gives  .1  his  promissory  note  for 
five  hundred  dollars  ($500.00)  payable  to  ..4 '5  order.     The  ring  proves 


120  COMMERCIAL  LAW 

to  be  paste.  A  cannot  recover  on  the  note  from  B.  If,  however, 
before  it  is  due,  A  sells  the  note  to  C,  w^ho  pays  value  for  it  without 
notice  of  the  fraud,  C  can  force  B  to  pay  the  note. 

Duress  is  actual  or  threatened  violence  sufficient  under  the  cir- 
cumstances to  compel  a  person  to  act  against  his  wishes.  In  con- 
nection with  negotiable  instruments,  duress  is  treated  as  the  same 
kind  of  a  defense  as  fraud.  It  is  a  complete  defense  as  against  the 
guilty  party,  but  is  not  available  as  against  an  innocent  purchaser. 

144.  Lost  or  Stolen  Negotiable  Instruments.  The  primary 
function  of  negotiable  instruments  is  to  circulate  like  money.  If 
a  negotiable  instrument  is  indorsed  in  blank,  or  made  payable  to 
bearer,  it  may  circulate  without  further  indorsement.  If  such  a  nego- 
tiable instrument  is  lost  or  stolen,  and  purchased  before  maturity  by 
an  innocent  party,  the  maker  is  liable  thereon.  For  example,  if  A 
makes  a  promissory  note  payable  to  bearer,  and  it  is  stolen  by  B  from 
A's  possession,  and  sold  for  value  to  C,  an  innocent  party,  C  may  collect 
the  note  from  A.  li  A  makes  a  promissory  note  payable  to  the  order 
of  B,  and  B  indorses  it  in  blank,  that  is,  writes  his  name  only,  on  the  back 
thereof,  and  it  is  stolen  from  B's  possession  by  C  and  sold  by  C  to  D, 
who  purchases  it  innocently  and  for  value,  D  may  collect  the  note 
from  A.  This  is  the  principal  distinction  between  negotiable  in- 
struments and  ordinary  contracts.  If  the  thief  changes  the  instru- 
ment in  any  material  way,  or  is  obliged  to  forge  someone's  name  to 
pass  it,  this  constitutes  a  forgery  and  no  recovery  can  be  had  thereon. 

145.  Real  and  Personal  Defenses  to  Negotiable  Instruments. 
Defenses  to  negotiable  instruments  are  usually  classified  as  real  and 
'personal.  If  they  are  good  only  against  a  particular  person,  they 
are  said  to  be  personal.  If  they  are  good  as  against  everyone,  they 
are  said  to  be  real.  If  the  instrument  is  forged,  given  by  an  infant, 
a  person  under  legal  age,  is  illegal — for  example  given  for  a  gambling 
contract  made  illegal  by  statute — or  has  been  materially  altered,  it 
is  void,  regardless  of  who  holds  it.  These  defenses  are  called  real 
defenses.  If  the  instrument  is  lost  or  stolen,  and  purchased  by  an  in- 
nocent party,  if  given  by  reason  of  duress  or  fraud,  or  if  there  is  no 
consideration,  the  defense  is  good  only  as  against  the  guilty  party. 
These  defenses  are  called  personal  defenses. 

146.  Consideration.  A  consideration  is  usually  defined  to  be 
something  beneficial  to  the  party  making  a  promise,  or  something 


COMMERCIAL  LAW  121 

detrimental  to  the  party  to  whom  a  promise  is  made.  Every  ordinary 
contract  must  be  supported  by  a  consideration.  Negotiable  instru- 
ments differ  from  ordinary  contracts  in  that  they  are  made  to  circulate 
like  money.  In  order  that  they  may  circulate  like  money  the  maker 
is  not  permitted  in  some  instances,  to  assert  that  the  instrument  lacks 
consideration.  As  between  the  immediate  parties  to  a  negotiable 
instrument,  there  must  be  a  consideration.  The  maker  may  success- 
fully defend  against  an  action  based  thereon  for  this  reason.  If, 
however,  the  instrument  has  passed  before  due,  to  an  innocent  pur- 
chaser for  value,  the  maker  cannot  refuse  payment  on  the  ground  of 
no  consideration.  In  case  of  a  negotiable  instrument,  consideration  is 
presumed.  Consideration  need  not  be  stated  in  the  instrument.  It 
amounts  to  a  defense,  only  as  between  immediate  parties.  If  A  gives 
B  his  promissory  note  payable  to  B's  order,  with  the  understanding 
that  B  is  not  to  use  the  note,  but  is  to  show  it  to  C,  his  grocer,  for  the 
purpose  of  obtaining  credit,  and  B  endeavors  to  collect  the  note  from 
A,  A  may  successfully  defend  on  the  ground  of  no  consideration. 
If,  however,  B  sells  the  note  to  D  before  it  is  due,  and  for  value,  D, 
not  knowing  there  is  no  consideration,  can  collect  the  note  from  A. 
147.  Presentment  and  Acceptance  of  Drafts.  Drafts  payable 
at  sight,  or  after  sight,  must  be  presented  to  the  drawee  for  accept- 
ance. This  is  for  the  reason  that  the  time  of  payment  of  such  drafts 
is  uncertain.  If  a  draft  of  which  presentment  is  necessary,  is  not 
presented  for  acceptance,  the  drawer  and  indorsers  are  discharged. 
Presentment  for  acceptance  must  be  made  to  the  acceptor  within  a 
reasonable  time  after  receipt  by  the  payee  or  indorsee,  ^^^lat  con- 
situtes  reasonable  time  for  presentment  depends  upon  the  circum- 
stances connected  with  each  particular  case.  Presentment  for  ac- 
ceptance is  made  by  exhibiting  the  bill  for  acceptance  to  the  person 
upon  whom  it  is  drawn.  Presentment  for  acceptance  may  be  made 
by  the  payee,  or  his  indorsee,  and  may  be  made  to  the  drawee,  his 
authorized  agent  or  legal  representative.  Presentment  may  be  made 
either  at  the  person's  place  of  business,  or  at  his  residence.  If  made  at 
his  place  of  business,  it  must  be  made  during  business  hours.  It 
cannot  lawfully  be  made  after  noon  on  Saturdays,  nor  can  it  be  made 
on  Sundays  or  legal  holidays.  Acceptance  may  be  indicated  by 
writing  accepted  or  words  to  that  effect  on  the  bill,  by  a  separate 
writing  to  that  effect,  or  by  oral  agreement  of  the  drawee.     If  the  bill 


122  COMMERCIAL  LAW 

contains  a  stipulation  not  requiring  acceptance,  this  is  called  waiver 
of  acceptance,  and  the  bill  need  not  be  presented  for  acceptance.  If 
acceptance  is  refused,  or  not  made  for  any  reason,  anyone  may  accept 
the  bill.  This  is  called  acceptance  for  honor,  or  acceptance  supra 
protest.  The  liability  of  an  acceptor  for  honor  is  that  if  the  bill  is 
presented  to  the  drawee  at  maturity  for  payment  and  refused,  and 
notice  thereof  given  the  acceptor  for  honor,  the  latter  will  pay  it. 

A  bill  or  draft  payable  at  a  definite  time  or  date  need  not  be 
presented  for  acceptance.  For  example,  if  a  bill  is  drawn  payable 
December  23,  1909,  it  need  not  be  presented  for  acceptance.  The 
time  of  payment  is  certain,  and  if  presented  for  payment  on  Decem- 
ber 23,  and  dishonored,  notice  of  non-payment  to  the  drawer  and 
prior  indorsers  is  sufficient  to  enable  the  payee  to  hold  them  liable. 
If,  however,  the  bill  is  payable  at  sight,  or  three  days  after  sight,  or 
any  time  after  sight,  it  must  be  presented  for  acceptance  to  fix 
the  date  of  maturity.  If  a  bill  is  not  paid  by  the  acceptor 
after  acceptance,  notice  must  be  given  the  drawer  and  prior  indorsers 
by  the  holder,  to  enable  him  to  hold  the  drawer  and  prior  indorsers 
liable.  This  is  sufficient  in  case  of  an  inland  bill.  In  case  of  a  foreign 
bill,  one  drawn  on  a  person,  or  made  payable  to  a  person  in  another 
state  or  country  from  the  drawee,  formal  protest  must  he  made  in 
case  of  non-payment  or  non-acceptance.  Protest  is  a  formal  act  of 
a  notary  public.     This  is  explained  under  a  separate  section. 

148.  Time  of  Payment  and  Days  of  Grace.  A  negotiable  in- 
strument is  payable  at  the  time  mentioned  in  the  instrument.  IF 
a  negotiable  instrument  is  payable  a  stipulated  time  after  date,  and 
the  instrument  bears  no  date,  its  date  is  the  time  it  was  delivered. 
The  term  month,  is  held  to  mean  calendar  month,  and  not  a  certain 
number  of  days.  If  a  note  is  dated  February  6th,  and  is  payable 
one  month  after  date,  it  matures  March  6th.  When  a  negotiable 
instrument  is  payable  a  specified  number  of  days  after  date,  the  time 
is  counted  by  excluding  the  day  on  which  the  instrument  is  given, 
and  including  the  final  day  stipulated.  Negotiable  instruments  may 
be  made  payable  on  demand  of  the  payee  or  holder.  Such  paper  is 
payable  at  the  option  of  the  holder.  It  is  sometimes  called  paper 
payable  on  call.  Negotiable  instruments  may  be  made  payable  on 
or  before  a  certain  day.  These  instruments  are  valid  negotiable  in- 
struments.    They  really  mature  at  the  day  fixed  in  the  instrument. 


COMMERCIAL  LAW  123 

but  may  be  paid  at  any  time  after  delivery  at  the  option  of  the  payee 
or  holder.  According  to  the  Law  Merchant,  three  days  were  allowed 
the  party  liable  on  a  bill  or  note  to  make  payment,  in  addition  to 
the  time  fixed  for  payment.  These  were  called  days  of  grace.  In 
the  majority  of  the  states,  days  of  grace  have  been  abolished  by  statute. 
When  not  abolished  by  statute,  days  of  grace  are  still  allowed. 

149.  Innocent  Purchaser  for  Value  Without  Notice.  The 
feature  that  distinguishes  negotiable  instruments  from  ordinary  con- 
tracts is  that  negotiable  instruments  may  be  transferred  in  such  a 
manner  that  the  transferee  receives  the  instrument  free  from  cer- 
tain defenses  which  are  good  against  the  transferror.  For  example, 
one  who  purchases  another's  rights  under  an  ordinary  contract  takes 
the  exact  position  of  the  transferror.  Any  defenses  good  against  the 
seller  are  good  against  the  purchaser.  However,  a  purchaser  for 
value  before  maturity  of  negotiable  instrument,  who  has  no  notice 
of  any  defenses  to  the  instrument,  takes  it  free  from  all  but  real  de- 
fenses. Real  defenses  are  infancy  of  the  maker,  forgery,  material 
alteration,  and  illegality.  But  such  a  defense  as  fraud,  want  of 
consideration,  duress,  or  any  except  a  real  defense  is  not  available 
against  an  innocent  purchaser  for  value  without  notice.  An  in- 
nocent purchaser  for  value  without  notice,  of  a  negotiable  instru- 
ment, is  also  called  a  bona  fide  holder,  or  a  holder  in  due  course.  A 
person  who  purchases  a  negotiable  instrument  showing  defects  or 
defenses  on  its  face,  cannot  claim  to  be  a  bona  fide  holder.  A  per- 
son who  purchases  negotiable  instruments  after  maturity,  takes  them 
subject  to  all  defenses  good  against  the  seller.  Such  a  purchaser  is 
not  a  bona  fide  holder. 

150.  Presentment  for  Payment  of  Negotiable  Instruments.  So 
far  as  the  maker  or  acceptor  of  negotiable  instruments  is  concerned, 
in  the  absence  of  a  place  for  payment  stipulated  in  the  instrument, 
a  negotiable  instrument  does  not  have  to  be  presented  for  payment. 
As  a  matter  of  practice,  however,  negotiableinst  ruments  are  pre- 
sented to  the  maker  and  acceptor  at  their  places  of  business  or  at 
their  residences  for  payment  at  maturity.  In  order  to  hold  indorsers, 
however,  a  negotiable  instrument  must  be  presented  to  the  maker 
or  acceptor  at  maturity,  and,  in  case  of  failure  to  pay,  notice  must  be 
given  indorsers,  else  they  are  relieved  from  liability.  When  a  place 
for  payment  is  specified  in  a  negotiable  instrument,  presentment  at 


124  COMMERCIAL  LAW 

that  place  is  sufficient.  When  no  place  of  payment  is  designated  in 
the  instrument,  presentment  to  the  maker  or  acceptor  personally, 
wherever  he  may  be  found,  or  at  his  residence  or  place  of  business  is 
sufficient. 

151.  Notice  of  Dishonor  and  Protest.  WTien  a  negotiable  in- 
strument has  been  presented  to  a  maker  or  acceptor  for  payment, 
and  payment  has  been  refused,  the  holder  should  notify  the 
drawer,  if  the  instrument  is  a  bill  of  exchange  or  draft,  and  the 
indorsers,  no  matter  what  the  form  of  the  negotiable  instrument,  of 
the  fact  of  dishonor.  If  such  notice  is  not  given,  the  acceptor  or  in- 
dorsers are  discharged  from  liabilty.  This  notice  should  be  given  by 
the  holder  of  the  paper,  or  his  agent,  within  a  reasonable  length  of 
time  after  dishonor.  The  notice  may  be  given  by  a  verbal 
notification,  by  the  delivery  of  written  message,  or  by  mailing  notice 
to  the  residence  or  place  of  business  of  the  indorsers  or  drawer. 
Everyone  whom  a  holder  desires  to  hold  liable,  must  be  notified  in 
case  of  dishonor.  If  a  drawer  of  a  bill  or  an  indorser  of  a  note  waives 
notice  of  dishonor  by  so  stipulating  in  the  instrument,  notice  as  to 
them  is  unnecessary.  In  case  of  an  inland  bill,  mere  notice  in  writing 
mailed  to  their  usual  address,  or  actual  notice  is  sufficient.  By  in- 
land bill  is  meant  one  made  payable,  or  to  be  accepted  in  the  same 
state  or  country  where  drawn.  In  case  of  a  foreign  bill  of  exchange, 
or  one  made  payable,  or  to  be  accepted,  in  a  state  or  country  other  than 
where  made  or  drawn,  notice  of  dishonor  must  be  by  protest.  This 
is  true  of  notice  to  the  drawer  for  failure  of  a  drawee  to  accept,  as 
well  as  for  failure  of  an  acceptor  to  pay.  Protest  is  a  formal  decla- 
ration of  a  notary  public,  an  officer  recognized  by  all  countries  as 
authorized  to  administer  oaths.  Technically,  only  bills  of  exchange 
need  be  protested.  By  practice,  however,  promissory  notes  and 
checks  are  protested  as  well. 

152.  Certificate  of  Protest.  The  following  is  a  common  form 
of  protest: 

State  of  Ohio  I 
Cuyahoga  Co.  f 

I,  John  Arthur,  a  notary  public,  having  been  duly  appointed  and 
sworn,  and  residing  at  Cleveland,  Cuyahoga  Co.,  Ohio,  do  certify 
that  on  the  10th  day  of  December  1909,  I  presented  the  annexed 
promissory  note  for  payment  at  the  City  Trust  Co.,  where  same 
is  made  payable,  and  that  I  did  this  at  the  request  of  the  State 
Trust  Co.,  and  that  payment  was  refused. 


COMMERCIAL  LAW  125 

I  further  certify  that  I  did  protest,  and  I  do  now  publicly  protest 
against  the  maker,  indorsers,  and  all  others  concerned,  for  all 
costs  and  damages  connected  with  the  failure  to  pay  this  instru- 
ment. I  certify  that  I  am  not  interested  in  any  way  in  this 
instrument.  I  further  certify  that  I  have  this  day  deposited  in 
the  Post  OflSce  at  Cleveland,  Ohio,  notices  of  this  protest,  signed 
by  me  as  notary  public,  and  addressed  to  the  following  persons, 
(Names  and  addresses  of  persons  connected  with  the  instru- 
ment.) In  testimony  whereof  I  have  hereto  affixed  my  signa- 
ture and  seal  of  my  office,  this  10th  day  of  Dec,  1909. 

John  Arthur, 


Notary 
Seal. 


Notary  Public. 


QUIZ  QUESTIONS 

PARTNERSHIPS 


1.  May  a  party  do  business  under  a  name  other  than  his  own? 

2.  If  a  party  uses  a  trade  name  does  this  constitute  a  partner- 
ship? 

3.  Define  partnership,  and  give  an  example  of  an  agreement 
constituting  a  partnership. 

4.  How  many  persons  may  engage  in  a  single  partnership 
enterprise? 

5.  Give  the  principal   features  of  the  partnership  relation. 

6.  How  is  a  partnership  created? 

7.  May  partnerships  be  created  by  oral  agreement?    If  so, 
give  an  example  of  an  oral  partnership  agreement. 

8.  Must  any  kind  of  partnership  agreement  be  in  writing? 
If  so,  give  an  example. 

9.  What  is  meant  by  partnership  by  estoppel? 

10.     Give  an  example  of  an  executory  partnership  agreement. 
IL     What  classes   of  persons   may  legally   become   partners? 

12.  May  an  infant  become  a  partner? 

13.  A,  aged  twenty-two  years,  enters  into  a  partnership  with 
B,  aged  seventeen.  May  A  avoid  a  contract  of  the  partnership  made 
with  C,  a  third  person,  on  account  of  the  infancy  of  Bf 

14.  Give  an  example  of  an  infant  ratifying  a  partnership 
agreement. 

15.  Can  drunken  or  insane  persons  enter  into  partnerships? 


126  COMMERCIAL  LAW 

16.  What  names  are  partners  entitled  to  take  as  partnership 
names? 

17.  Can  a  partnership  take  the  name  of  another  partnership? 
If  not,  why  not? 

18.  Can  a  partnership  take  a  name  which  does  not  suggest  the 
name  of  any  of  the  partners  interested? 

19.  Can  a  partnership  ever  have  more  than  one  name?  If 
so,  under  what  circumstances? 

20.  Give,  and  define  the  names  applied  to  different  kinds  of 
partners. 

21.  Distinguish  silejit  partners   and    secret   partners. 

22.  May  a  partnership  exist  as  between  the  partners,  and  not 
exist  as  to  third  persons  trading  with  the  partnership? 

23.  May  a  partnership  exist  as  to  third  persons  deahng  with 
an  apparent  partnership,  while  none  exists  between  the  apparent 
partners  themselves?    If  so,  give  an  example. 

24.  State  what  constitutes  a  partnership  as  to  third  persons 
dealing  with  a  partnership. 

25.  WTiat  are  the  powers  of  a  partnership? 

26.  Of  what  may  the  property  of  a  partnership  consist? 

27.  May  a  partnership  make  and  own  promissory  notes? 

28.  WTiat  constitutes  holding  a  person  out  as  a  partner? 

29.  WTiat  is  the  liability  of  a  person  held  out  as  a  partner? 

30.  Can  a  person  be  liable  as  a  partner  who  is  held  out  as  a 
partner  without  his  knowledge  or  consent? 

31.  What  are  the  duties  of  partners  to  each  other? 

32.  Can  one  partner  sue  his  partner  at  law? 

33.  If  one  partner  dishonestly  takes  possession  of  partnership 
assets,  how  may  his  partner  get  legal  relief? 

34.  What  is  meant  by  joint  liability  of  partners? 

35.  What  is  meant  by  liability  in  solidof 

36.  What  is  partnership  liability  to  third  persons? 

37.  Is  the  individual  property  of  members  of  the  partnership 
liable  to  be  subjected  to  the  payment  of  partnership  claims? 

38.  When,  if  at  all,  can  the  property  of  individual  partners 
be  subjected  to  the  payment  of  judgments  against  the  partnership 
before  the  property  of  the  partnership  has  been  exliausted? 


COMMERCIAL  LAW  127 

39.  What  is  the  individual  liability  of  the  members  of  a  partner- 
ship for  the  partnership  debts? 

40.  ^^^lat  effect,  if  any,  does  change  of  membership  have  upon 
a  partnership? 

41.  Does  the  addition  of  a  new  member  dissolve  a  partner- 
ship? 

42.  Does  withdrawal  of  a  member  discharge  a  partnership  ? 

43.  What  effect,  if  any,  does  death  of  a  partner  have  upon  a 
partnership? 

44.  Define  survivorship. 

45.  ^^^lat  are  the  rights  and  duties  of  survivors  of  a  partner- 
ship? 

46.  In  what  ways  may  a  partnership  be  dissolved? 

47.  In  what  cases  must  notice  of  dissolution  of  partnership  be 
given? 

48.  How,  and  to  whom  must  notice  of  dissolution  of  partner- 
ship be  given? 

49.  Upon  dissolution  of  a  partnership  what  part  of  the  firm 
assets  belongs  to  firm  creditors,  and  what  part  of  individual  assets 
belongs  to  individual  creditors? 

50.  In  case  a  partnership  is  insolvent,  and  there  is  no  living 
solvent  partner,  what  rights  have  firm  creditors  in  the  assets  of  the 
individual  partners  as  compared  with  individual  creditors  ? 

51.  Define  and  describe  limited  partnership. 

52.  What  is  the  principal  distinction  between  limited  and 
general  partnership? 

53.  Define  special  partner  as  used  in  connection  with  limited 
partnerships. 

CORPORATIONS 

1.  Define  corporation. 

2.  May  an  association  of  persons  create  a  corporation  by 
agreement? 

3.  Is  a  corporation  a  natural  person? 

4.  How  were  corporations  originally  created? 

5.  How  are  corporations  created  at  the  present  time? 

0.     Distinguish  the  creation  of  a  corporation  and  the  creation 
of  a  partnership. 


128  COMMERCIAL  LAW 

7.  For  what  purpose  may  a  corporation  be  created? 

8.  What  is  the  franchise  of  a  corporation? 

9.  Is  a  partnership  distinct  from  the  members  composing  it? 

10.  Is  a  corporation  dissolved  by  a  change  of  membership? 

11.  When  does  a  partnership  cease  to  exist? 

12.  Are  the  members  of  a  corporation  agents  of  the  corporation? 

13.  WTio  are  the  authorized  agents  of  a  partnership? 

14.  What  are  the  powers  of  a  corporation? 

15.  Enumerate  the  ordinary  powers  of  a  corporation. 

16.  Is  the  charter  of  a  corporation  a  contract? 

17.  May  a  charter  of  a  corporation  be  revoked  at  the  will  of 
the  legislature  that  granted  it? 

18.  How  are  corporations  created? 

19.  What  is  meant  by  a  corporation's  charterf 

20.  What  kinds  of  corporations,  if  any,  may  be  organized  under 
United  States  laws? 

21.  By  what  authority  are  national  banks  organized? 

22.  Under  what  provisions  are  most  corporations  organized? 

23.  Under  what  conditions  may  corporate  charters  be  revoked? 

24.  State  briefly  the  necessary  steps  in  organizing  a  corporation. 

25.  Must  a  corporation  have  a  corporate  name? 

26.  May  a  corporation  change  its  name? 

27.  May  two  corporations  use  the  same  name? 

28.  May  a  corporation  appropriate  a  name  descriptive  of  an 
article  manufactured? 

29.  Give  an  example  of  a  name  a  corporation  is  not  permitted 
to  appropriate. 

30.  Classify  corporations. 

31.  Define   and   distinguish   private   corporations   and    public 
corporations. 

32.  Give  an  example  of  a  public  corporation;  a  private  cor- 
poration. 

33.  Is  a  street  railway  company  a  private  or  public  corporation? 

34.  When  does  a  corporation's  existence  commence? 

35.  W^hat   determines   when   a   corporation's   existence   com- 
mences? 

36.  Define  estoppel. 


COMMERCIAL  LAW  129 

37.  Give  an  example  of  a  corporation  estoppel  from  denying 
its  corporate  existence. 

38.  Are  third  persons  ever  estopped  from  denying  a  corpora- 
tion's legal  existence?     If  so,  give  an  example. 

39.  Is  a  corporation's  charter  a  contract? 

40.  If  a  corporation's  charter  is  a  contract,  who  are  the  con- 
tracting parties? 

41.  At  the  present  time  can  a  corporation  obtain  an  irrevocable 
charter? 

42.  Define  de  facto  corporation. 

43.  Define  de  jure  corporation. 

44.  Can  a  de  facto  corporation  avoid  its  liabilities  on  the  ground 
of  incomplete  organization? 

45.  WTio  can  object  to  a  de  facto  corporation  being   incom- 
pletely organized? 

46.  What  is  necessary  to  creat  a  de  facto  corporation? 

47.  Define  promoter. 

48.  Is  a  promoter  personally  liable  for  the  obligations  made 
by  himself  in  connection  with  organizing  a  corporation? 

49.  Is  a  corporation   responsible  for  the  obligations  created 
by  its  promoter? 

50.  How,  if  at  all,  may  a  corporation  adopt  the  obligations  of 
its  promoters? 

51.  May  a  corporation  be  reorganized  by  consent  of  its  members? 

52.  Is  a  reorganized  corporation  a  new  corporation,  or  a  con- 
tinuation of  the  old  corporation? 

53.  Is  a  reorganized  corporation  ever  liable  for  the  obligations 
of  the  old  corporation? 

54.  May  a  reorganized  corporation  ever  escape  the  obligations 
of  the  old  corporation? 

55.  How,  if  at  all,  may  corporations  consolidate? 

56.  Is  a  consolidated  corporation  distinct  from  the  corporation 
from  which  it  is  formed? 

57.  May  corporations  consolidate  by  consent  of  the  members 
of  each? 

58.  Is  a  consolidated  corporation  liable  for  the  debts  of  its 
component  corporations? 


130  COMMERCIAL  LAW 

59.  What  is  the  governing  board  of  a  corporation  for  profit 
called  ? 

60.  How  are  directors  elected? 

CL  How,  and  under  what  circumstances  and  conditions  may 
corporate  meetings  be  held? 

G2.  Who  are  entitled  to  vote  at  corporate  meetings? 

63.  May  a  member  of  a  corporation  ever  have  more  than  one 
vote? 

64.  What  is  meant  by  cumulative  voting? 

65.  What  is  meant  by  ticket  voting? 

66.  Define  quorum. 

67.  What  constitutes  a  quorum? 

68.  Must  a  member  of  a  corporation  be  present  to   have  his 
shares  of  stock  voted? 

69.  How,  if  at  all,  may  a  shareholder  vote  by  proxy? 

70.  Who  are  members  of  a  corporation? 

7L  Is  a  stockholder  personally  liable   for  the  debts  of  the 
corporation? 

72.  What  is  the  liability  of  a  shareholder  in  a  national  bank? 

73.  What  is  meant  by  stockliolder's  double  liability? 

74.  How  may  a  person  become  a  stockholder  in  a  corporation? 

75.  What  is  a  certificate  of  stock? 

76.  May  a  person  become  a  stockholder  without  having  a  certifi- 
cate of  stock? 

77.  May  a  person  hold  a  certificate  of  stock  and  not  be  a  stock- 
holder? 

78.  Must  directors  of  a  corporation  be  stockholders? 

79.  How,  if  at  all,  is  the  authority  of  the  board  of  directors 
limited? 

80.  What  are  the  principal  duties  of  directors? 

81.  May  a  board  of  directors  dispose  of  the  entire  assets  of  the 
corporation  ? 

82.  May  directors  act  for  their  own  private  interests  in  dealing 
with  the  corporation? 

83.  May  a  director  ever  contract  with  the  corporation? 

84.  Define  by-laws,  rules,  and  regulations. 

85.  Distinguish  by-laws  and  resolutions. 

86.  Define  capitalization. 


COMMERCLA.L  LAW  131 

87.  Distinguish  capitalization   from  assets  of  a  corporation. 

88.  Define  capital  stock. 

89.  May  a  corporation  sell  its  shares  for  less  than  par? 

90.  Distinguish  par  value  and  face  value  of  stock. 

91.  If  a  corporation  sells  a  shareholder  stock  at  5%  of  its  par 
value,  and  the  corporation  is  solvent,  who,  if  any  one,  may  object? 

92.  Must  shares  be  paid  for  in  money? 

93.  If  a  person  purchases  shares  from  a  stockholder  at  less  than 
par,  not  knowing  that  the  shares  have  not  been  paid  for  in  full,  is  he 
liable  to  the  corporation  for  the  balance  of  their  par  value? 

94.  Define  call  and  assessment. 

95.  May  an  assessment  be  made  before  a  call? 

96.  May  an  assessment  be  made  on  stock  paid  for  at  par? 

97.  Define  and  give  an  example  of  watered  stock. 

98.  Upon  what  authority  may  the  capital  stock  of  a  corporation 
be  increased  or  decreased? 

99.  What  is  a  stock  dividend? 

100.  How  many  kinds  of  stock  are  there? 

101.  Define  preferred  stock,  and  distinguish  it  from  common 
stock. 

102.  Do  preferred  stockholders  have  any  advantage  over  com- 
mon stockholders  when  the  affairs  of  the  corporation  are  wound  up, 
and  its  assets  distributed? 

103.  How  may  dividends  be  paid? 

104.  May  a  stockholder  force  the  corporation  to  pay  a  dividend? 

105.  When,  if  at  all,  are  dividends  debts  of  the  corporation? 

106.  Are  certificates  of  stock  negotiable  instruments? 

107.  Distinguish  certificates  of  stock  from  regular  negotiable 
instruments. 

108.  How  are  transfers  of  stock  made  by  the  corporation? 

109.  What,  if  any,  is  the  individual  liability  of  a  stockholder 
for  the  debts  of  the  company? 

110.  What  ownership,  if  any,  does  a  stockholder  have  in  the 
property  of  the  corporation? 

111.  Can  a  corporation  transact  business  without  the  aid  of 
oflBcers  and  agents? 

112.  How  are  the  oflBcers  of  a  corporation  appointed? 

113.  What  are  the  usual  officers  of  a  corporation? 


132  COMMERCIAL  LAW 

114.  What  are  the  duties  of  the  president  of  a  corporation? 

115.  May  the  officers  of  a  corporation  ever  act  without  the  ex- 
press authority  of  the  board  of  directors? 

116.  What  is  the  proper  corporate  signature  to  a  contract? 

117.  WTiat  is  the  proper  corporate  signature  to  a  negotiable 
instrument? 

118.  Can  a  corporation  legally  sign  a  contract  without  using 
its  seal? 

119.  Define  ultra  vires. 

120.  Give  an  example  of  an  ultra  vires  act. 

121.  Are  third  persons  deemed  to  have  notice  of  the  powers 
and  limitations  of  a  corporation. 

122.  Does  a  corporation  have  any  rights  outside  the  state  of  its 
creator? 

123.  "What  kind  of  corporations,  if  any,  are  authorized  by  the 
United  States  Constitution  to  transact  business  in  any  state? 

124.  What  are  the  general  provisions  of  the  states  regulating 
foreign  corporations? 

125.  Explain  the  meaning  of  the  term  doing  business  as  applied 
to  foreign  corporations. 

126.  Is  a  corporation  liable  for  its  torts  and  crimes. 

127.  How,  if  at  all,  can  a  corporation  be  punished? 

128.  A\Tiat  is  meant  by  dissolution  of  a  corporation? 

129.  How  can  a  corporation  be  dissolved? 

130.  Can  a  corporation  be  dissolved  by  consent  of  its  members? 

NEGOTIABLE  INSTRUMENTS 

1.  Name  some   of   the   most  common   forms   of  negotiable 
instruments. 

2.  What  is  a  negotiable  instrument? 

3.  "What   advantages    do    negotiable    instruments  have  over 
money  for  commercial  uses? 

4.  Define  negotiabilily. 

5.  Are  all  promissory  notes  negotiable  instruments? 

6.  What  words  are  necessary  to  make  an  instrument  negoti- 
able? 

7.  May  an  instrument  be  negotiable  without  containing  the 
words  or  order,  or  or  hearer? 


com:\iercial  law  133 

8.  ^\Tiat  kind  of  negotiable  instrument,  if  any,  can  be  trans- 
ferred without  indorsement? 

9.  Define  assigmnent. 

10.  Can  negotiable  instruments  be  assigned? 

11.  Distinguish  assignability  from  negotiability. 

12.  What  is  meant  by  the  law  merchaiitf 

13.  How  do  we  happen  to  recognize  the  rules  of  the  law  mer- 
chant? 

14.  \Vhen  was  the  law  merchant  first  recognized  in  England? 
15  To  what  classes  of  negotiable  instruments  were  the  rules 

of  the  law  merchant  originally  applied? 

16.  To  what  classes  of  negotiable  instruments  are  the  rules  of 

the  law  merchant  now  applied? 

17  Define  promissory  note. 

18.  Name  the  parties  to  a  promissory  note. 

19.  Give  the  essential  features  of  a  promissory  note. 

20.  Must  a  promissory  note  be  dated? 

21.  Distinguish  drafts  and  bills  of  exchange. 

22.  Give  the  names  of  the  parties  to  a  bill  of  exchange. 

23.  How  is  a  bill  of  exchange  accepted  ? 

24.  What  is  a  checkf 

25.  How  does  a  check  differ  from  a  bill  of  exchange? 

26.  Are  days  of  grace  allowed  in  the  payment  of  checks? 

27.  WTiat  is  certification  of  a  check? 

28.  \^^lat  effect  does  certification  of  a  check  at  the  request  of 
the  payee  have  upon  the  maker? 

29.  Are  bonds  negotiable  instruments? 

30.  WTiat  are  registered  hondsf 

31.  What  are  coupon  bonds? 

32.  What  are  trust  deeds? 

33.  What  are  collateral  notes? 

34.  Are  collateral  notes  negotiable? 

35.  By  whom  are  collateral  notes  commonly  used? 

36.  \Miat  is  a  cognovit  note? 

37.  How  does  a  cognovit  note  differ  from  an  ordinary  note? 

38.  Define  certificate  of  deposit. 

39.  How  does  a  certificate  of  deposit  differ  from  a  check? 

40.  Is  a  bank  liable  upon  its  certificates  of  deposit? 


134  COMMERCIAL  LAW 

4L     Give  the  requisites  of  a  negotiable  instrument. 

42.  Does  every  negotiable  instrument  require  a  payee? 

43.  May  a  negotiable  instrument  be  signed  by  mark? 

44.  Is  an  "I.  O,  U."  a  negotiable  instrument? 

45.  Name  the  necessary  parties  to  a  negotiable  instrument. 

46.  How  does  a  second  indorser  differ  from  a  first  indorser? 

47.  What  is  the  liability  of  a  drawer  of  a  bill  of  exchange? 

48.  Distinguish  foreign  bills  of  exchange  and  inland  bills  of 
exchange. 

49.  What  kinds  of  bills  of  exchange  must  be  protested? 

50.  Distinguish  between  drawee  and  acceptor. 

51.  What  is  the  liability  of  an  acceptor? 

52.  How  may  a  bill  of  exchange  be  accepted? 

53.  What  is  a  qualified  acceptance? 

54.  In  case  of  a  qualified  acceptance,  if  the  acceptor  fails  to 
pay  the  draft  at  maturity  is  the  drawer  liable? 

55.  WTiat  is  the  liability  of  a  maker  of  a  promissory  note? 

56.  If  a  note  is  made  payable  at  a  bank,  and  is  not  presented  at 
the  bank  at  maturity,  is  the  maker  discharged? 

57.  Define  indorsement 

58.  Define  blaiik  indorsement. 

59.  WTiat  is  the  difference  as  to  transferability  between  a  note 
payable  to  bearer  and  one  indorsed  in  blank? 

60.  Define  allonge. 

61.  Define  indorsement  in  full. 

62.  Distinguish  between  the  liability  of  one  who  indorses  in 
blank  and  one  who  indorses  in  full. 

63.  If  a  note  indorsed  in  blank,  is  subsequently  indorsed  in 
full,  can  it  be  transferred  by  delivery  without  the  indorsement  of  the 
indorsee  in  full? 

64.  Define  and  explain  indorsement  without  recourse, 

65.  What  is  the  liability,  if  any,  of  an  indorser  in  full? 

66.  Does  an  indorsement  for  collection  destroy  the  negotiability 
of  a  note? 

67.  What  is  the  purpose  of  an  indorsement  for  collection? 

68.  Give  an  example  of  an  anomalous  indorser. 

69.  What  is  the  difference  between  an  anomalous  indorser  and 
an  indorser  outside  the  chain  of  title. 


COMMERCIAL  LAW  135 

70.  In  most  jurisdictions  what  is  the  liabiUty  of  an  anomalous 
indorser? 

7L  In  general,  what  is  the  liability  of  an  indorser? 

72.  Define  indorser. 

73.  ^^^lat  are  the  warranties  of  an  indorser? 

74.  Are  the  warranties  of  an  indorser  express  or  implied? 

75.  Define  forgery. 

76.  Does  forgery  render  a  negotiable  instrument  void  or  void- 
able? 

77.  Distinguish  between  forgery  and  material  alteration. 

78.  If  a  note  is  materially  altered  by  a  stranger  is  it  void? 

79.  Define  fraud. 

80.  Distinguish  fraud  and  duress. 

81.  Are  fraud  and  duress  good  defenses  as  against  a  bond,  fide 
holder. 

82.  If  a  forged  note  is  lost  or  stolen  can  it  be  collected? 

83.  If  a  note  procured  through  fraud  is  lost  or  stolen  can  it  be 
collected  by  an  innocent  holder? 

84.  Define  real  defense  to  a  negotiable  instrument. 

85.  WTiat  is  meant  by  'personal  defense? 

86.  Enumerate  the  real  defenses  to  a  negotiable  instrument. 

87.  Enumerate  the  personal  defenses  to  a  negotiable  instru- 
ment. 

88.  Define  consideration. 

89.  Must  consideration  be  stated  in  a  negotiable  instrument? 

90.  What  kind  of  drafts  must  be  presented  for  acceptance? 

91.  How  are  drafts  presented  for  acceptance? 

92.  What  must  a  holder  do  if  a  draft  is  dishonored  ? 

93.  Define  protest. 

94.  When  must  negotiable  instruments  be  paid? 

95.  What  are  days  of  grace? 

96.  Do    most    jurisdictions    recognize   days   of  grace   at   the 
present  time  ? 

97.  Define  innocent  purchaser  for  value  witlwut  notice. 

98.  Define  bond  fide  holder. 

99.  Define  holder  in  due  course. 

100  Distinguish  bond  fide  holder  and  assignee  of  a  negotiable 
instrument. 


136  COMMERCIAL  LAW 

lOL     Can  a  person  be  a  bond  fide  holder  of  a  note  who  purchases 
it  after  it  is  due? 

102.  For  what  purpose  must  a  negotiable  instrument  be  pre- 
sented for  payment? 

103.  Can  indorsers  of  a  negotiable  instrument  be  held  if  the  note 
is  not  presented  for  payment? 

104.  How  is  a  negotiable  instrument  presented  for  payment? 

105.  Explain  notice  of  dishonor. 

106.  Wliat  is  the  necessity  of  giving  notice  of  dishonor? 

107.  How  is  notice  of  dishonor  given? 

108.  What  is  a  certificate  of  protest? 


COMMERCIAL  LAW 

PART  III 


BANKING,  LOANS,  MONEY  AND  CREDITS 

153.  Banks  Defined  and  Classified.  A  bank  may  be  defined 
to  be  an  institution  authorized  to  receive  money  for  deposit,  to  make 
loans,  and  to  issue  its  promissory  notes  payable  to  bearer.  A  bank 
may  have  any  one,  or  all  of  the  above  enumerated  powers.  Some 
banks  have  powers  in  addition  to  those  above  enumerated.  In  the 
absence  of  prohibiting  statute,  any  person  may  operate  a  private  bank. 
The  states  generally  have  statutes  authorizing  the  creation  and  regu- 
lation of  banks.  At  the  present  time,  most  banks  are  incorporated 
companies. 

As  to  the  source  of  their  existence,  banks  may  be  said  to  be 
national  and  state.  National  banks  are  organized  under  United 
States  statutes  regulating  their  creation  and  existence.  National 
banks  are  discussed  more  at  length  under  a  separate  section.  All 
banks  other  than  national  are  created  under  state  laws,  and  are  called 
state  banks. 

As  to  their  nature,  banks  are  generally  divided  into  three  kinds, 
banks  oj  deposit,  banks  oj  circulation  and  banks  of  discount.  Banks 
authorized  to  receive  money  for  safe  keeping  are  banks  of  deposit. 
Banks  authorized  to  purchase  commercial  paper  by  charging  in- 
terest in  advance  are  banks  of  discount.  Banks  authorized  to  issue 
their  own  promissory  notes  payable  to  bearer,  and  actually  issuing 
such  notes,  are  banks  of  circulation.  A  single  bank  may  be  a  bank 
of  discount,  of  circulation,  and  of  deposit,  or  it  may  be  a  bank  of  dis- 
count, of  circulation  or  of  deposit.  The  ordinary  savings  bank  is  a 
common  example  of  a  bank  of  deposit.  A  national  bank  issuing 
its  notes  is  a  common  example  of  a  bank  of  circulation.  A  national 
bank  usually  purchases  notes  for  less  than  their  face  value,  or  makes 
loans  upon  notes  deducting  its  interest  in  advance,  making  it  also  a 
bank  of  discount. 


l.'iS  COMMERCIAL  LAW 

154  Functions  and  Powers  of  Banks.  At  the  present  time 
most  banks  are  incorporated  companies.  Their  authority  to  exisi 
is  given  them  by  the  state.  Their  powers  are  hmited  by  the  provi- 
sions of  their  charter.  This  question  is  discussed  at  length  in  the 
section  on  corporations.  A  bank  cannot  engage  in  business  outside 
the  provisions  of  its  charter.  Incorporated  banks  are  permitted  to 
pass  by-laws  by  which  their  functions  may  the  more  readily  be 
carried  out,  and  by  which  the  duties  of  their  agents  are  restricted  or 
defined.  Reasonable  by-laws,  if  brought  to  the  notice  of  third  per- 
sons, also  well  recognized  customs  and  usages,  bind  third  persons  in 
their  dealing  with  banks.  Ordinarily,  banks  have  the  power  to  borrow 
money,  but  do  not  have  the  power  to  deal  in  real  estate.  National 
banks  have  no  power  to  loan  money  on  real  estate,  but  they  are  per- 
mitted to  take  real  estate  mortgages  to  prevent  losses  on  loans  already 
made.  A  bank  may  also  purchase  real  estate  sufficient  for  the  con- 
struction of  a  banking  building.  Banks  have  the  power  to  collect 
their  own  paper,  and  to  act  as  agents  for  persons  and  banks  in  col- 
lecting their  paper.  The  ordinary  functions  and  powers  of  banks 
are  discussed  under  separate  sections. 

155.  Deposits.  The  primary  function  of  a  bank  is  to  receive 
money  from  third  persons  and  to  loan  money  to  third  persons.  Money 
received  from  third  persons  is  money  received  on  deposit.  Banks 
cannot  be  compelled  to  receive  money  for  deposit  from  anyone.  They 
are  permitted  to  exercise  their  discretion  and  reject  such  deposits  as 
they  choose.  The  ordinary  method  of  making  deposits  is  by  delivery 
of  currency  consisting  of  gold,  silver,  copper,  and  nickel  coin,  bank 
notes  and  checks  to  an  agent  of  the  bank.  The  agent  authorized  to 
receive  deposits  is  usually  called  the  receiving  teller.  Deposits  are 
usually  entered  by  the  receiving  teller  in  the  customer's  pass  book. 
In  commercial  banks,  deposits  are  ordinarily  withdrawn  by  check, 
without  presenting  the  pass  book.  Savings  banks  ordinarily  do  not 
permit  their  customers  to  use  checks,  but  require  them  to  present 
their  pass  books  when  drawing  money.  The  amount  withdrawn  is 
entered  in  the  pass  book,  and  the  balance  brought  down.  When 
money  is  deposited  generally,  the  bank  has  the  right  to  mingle  it  with 
its  own  funds.  It  then  becomes  the  debtor  of  the  depositor  in  the 
amount  of  the  deposit.  If  a  fund  is  deposited  with  a  bank  for  a  special 
purpose,  and  the  bank  is  so  notified,  or  if  papers,  such  as  securities, 


COMMERCIAL  LAW  139 

bonds  and  certificates  of  stock  are  deposited  for  safe  keeping  only, 
they  are  known  as  special  deposits  and  are  not  mingled  with  the 
general  funds.  Subject  to  the  reasonable  rules  of  the  bank,  a  general 
deposit  is  subject  to  withdrawal  at  the  will  of  the  depositor. 

156.  Checks.  A  check  is  a  written  order  upon  a  bank  for  the 
payment  of  a  specified  sum  of  money  payable  upon  demand.  Com- 
mercial banks  generally  do  a  checking  business.  Some  banks,  such 
as  savings  banks,  do  not  permit  depositors  to  draw  checks  against 
their  deposits.  Savings  banks  not  doing  a  checking  business,  usually 
require  their  depositors  to  present  their  pass  books  when  drawing 
money.  Even  though  wTitten  orders  are  given  to  third  persons,  the 
pass  book  must  be  presented  by  the  third  person  to  enable  him  to 
obtain  the  money  on  the  order.  In  case  of  banks  which  do  a  check- 
ing business,  the  depositor  is  permitted  to  draw  checks  in  any  amount, 
payable  to  any  person.  The  bank  must  honor  these  checks  so  long 
as  the  maker's  deposit  is  sufficient  to  pay  them,  and  the  person 
presenting  them  is  properly  identified.  Upon  payment  of  a  check, 
the  bank  keeps  it  and  deducts  the  amount  from  the  maker's 
deposit.  These  paid  checks,  or  vouchers,  are  usually  returned  by 
the  bank  to  the  customer,  every  thirty  days,  with  a  statement  of  his 
account.  The  customer  then  examines  these  checks  and  compares 
them  with  his  books,  and  the  bank's  balance  with  his  balance,  for 
the  purpose  of  discovering  errors. 

A  check  is  payable  on  demand  and  should  be  presented  for  pay- 
ment within  a  reasonable  time  after  receipt.  If  the  receiver  lives 
in  the  same  place  as  the  maker,  the  check  should  be  presented  during 
the  business  hours  of  that  day.  If  the  receiver  resides  in  a  distant 
place,  the  check  should  be  presented  as  soon  as  possible  under  the 
circumstances.  As  long  as  the  bank  has  funds  of  the  maker,  it  must 
honor  his  checks.  If  the  bank  has  some  funds  of  the  maker,  but  not 
sufficient  to  pay  the  check  presented,  it  should  refuse  to  pay  anything 
thereon.  If  the  bank  refuses  to  honor  a  check  when  the  maker  has 
sufficient  funds  to  meet  it,  the  bank  is  liable  at  the  suit  of  the  depositor, 
for  any  damages  suffered. 

Receiving  a  check  does  not  of  itself  extinguish  the  debt.  The 
taker  of  the  check  may  present  it  for  payment,  and  if  payment  is 
refused  by  the  bank,  and  the  maker  is  notified  promptly,  the  taker 
may  sue  the  maker  on  the  check,  or  on  the  debt  for  which  the  check 


140  COMMERCIAL  LAW 

was  given.      Certified  checks  are  discussed    under   the   section   on 
negotiable  instruments. 

157.  Loans  and  Credits.  One  of  the  primary  functions  of 
banks  is  to  make  loans.  Different  kinds  of  banks  are  authorized 
to  make  different  kinds  of  loans.  Savings  banks  generally  are 
authorized  to  make  loans  on  real  estate.  National  banks  are  not 
permitted  to  loan  on  real  estate.  Banks  ordinarily  are  permitted  to 
discount  notes.  By  discounting  promissory  notes  is  meant  pur- 
chasing them  at  a  sum  less  than  their  face  value,  partially,  at  least, 
on  the  credit  of  the  seller.  Banks  are  not  permitted  to  discount  notes 
at  usurious  rates  of  interest.  Banks  are  restricted  by  their  corporate 
charters  as  to  the  nature  of  the  loans  they  can  make. 

Credit  is  the  term  applied  to  a  present  benefit  obtained  for  an 
agreement  to  do  something  in  the  future.  A  person's  credit  depends 
largely  upon  his  business  reputation  and  assets.  Companies  called 
mercantile  agencies  are  organized  for  the  sole  purpose  of  furnishing 
credit  information.  These  companies  publish  books  giving  the  trade 
records  and  estimated  assets  of  business  men  in  the  various  cities 
and  towns  of  the  different  states.  These  books  are  sold  to  whole- 
salers, or  to  anyone  desiring  credit  information.  Companies  also 
employ  men  to  obtain  and  furnish  special  reports  on  people's  assets 
and  business  reputation.  The  bulk  of  business  is  done  on  credit. 
Compared  with  the  total  business  transacted,  a  small  amount  is  done 
for  cash.     Credit  is  an  important  part  of  a  business  man's  capital. 

158.  Rights  and  Obligations  of  Banks  in  Case  of  Forged,  Lost, 
or  Stolen  Checks.  Forgery  or  material  alteration  of  a  negotiable 
instrument  renders  it  void.  Banks  are  authorized  by  depositors 
drawing  checks  to  pay  valid  checks,  but  not  forged  ones.  Ordinarily, 
a  bank  must  stand  the  loss  if  it  pays  a  forged  check.  The  only  excep-s 
tion  is  in  case  the  depositor  has  so  carelessly  drawn  the  check  that  it 
can  be  forged  without  the  bank  being  able  to  discover  the  forgery  by 
the  exercise  of  due  care.  Most  jurisdictions  also  hold  that  a  depositor 
must  examine  his  returned  checks  within  a  reasonable  time  after  their 
return  by  the  bank.  If  a  forgery  is  not  reported  within  a  reasonable 
time  after  the  return  of  the  check  by  the  bank,  the  check  is  presumed 
to  be  genuine,  and  the  depositor  cannot  thereafter  complain.  \Miere 
a  check  is  payable  to  bearer,  or  payable  to  order,  and  indorsed  in 
blank  by  the  payee,  making  it  payable  to  bearer,  and  is  lost  or  stolen. 


COMMERCIAL  LAW  141 

an  innocent  party  purchasing  it  from  the  finder  or  thief  gets  good  title 
to  it.  Such  paper  circulates  like  money  without  further  indorsement. 
A  bank  in  paying  such  a  check  to  a  bona  fide  holder  who  takes  it  from 
a  thief  or  finder  without  notice  of  its  having  been  lost  or  stolen,  is  not 
liable  to  the  maker  for  the  loss. 

159.  National  Banks.  The  constitution  of  the  United  States 
does  not  expressly  give  Congress  the  power  to  create  national  banks 
but  it  gives  Congress  the  power  to  collect  taxes,  duties  and  imports, 
to  borrow  and  coin  money  and  to  make  all  loans  necessary  to  carry 
into  execution  the  powers  expressly  given.  To  carry  into  effect  the 
powers  given  relating  to  money.  Congress  is  deemed  to  have  the  power 
to  create  national  banks.  Congress  has  passed  laws  under  which 
national  banks  may  be  organized  by  associations  consisting  of  not 
less  than  five  natural  persons  who  are  required  to  sign  and  file  articles 
with  the  comptroller  of  currency  at  Washington,  D.  C,  which  articles 
shall  specify  the  name  of  the  proposed  bank,  its  place  of  operation, 
its  capital,  the  names  and  residences  of  its  shareholders,  and  the  num- 
ber of  shares  held  by  each.  National  banks  may  be  organized  with 
a  capital  of  not  less  than  twenty-five  thousand  dollars  ($25,000.0(  ) 
in  cities  whose  population  does  not  exceed  three  thousand,  and  with 
a  capital  of  not  less  than  fifty  thousand  dollars  ($50,000.00)  in  places 
whose  population  does  not  exceed  six  thousand  inhabitants,  and  with 
a  capital  of  one  hundred  thousand  dollars  (Si 00 ,000. 00)  in  places 
whose  population  does  not  exceed  fifty  thousand  inhabitants,  and  with 
a  capital  of  not  less  than  two  hundred  and  fifty  thousand  dollars 
($250,000.00)  in  places  exceeding  fifty  thousand  inhabitants. 

Before  commencing  business,  national  banks  are  required  to  trans- 
fer and  deliver  to  the  treasurer  of  the  United  States,  United  States 
registered  bonds*,  in  amount  not  less  than  thirty  thousand  dollars 
($30,000.00),  and  not  less  than  one  third  the  paid-in  capital  stock. 
Upon  making  such  a  deposit  of  bonds,  the  comptroller  of  currency  is 
authorized  to  issue  to  the  bank,  notes  of  the  bank  in  different  denomi- 
nations, equal  to  the  par  value  of  the  bonds  deposited.  These  are 
the  only  circulating  notes  national  banks  are  authorized  to  use. 
The  comptroller  of  currency  is  authorized  to  replace  worn  notes 
or  returned  notes,  proof  of  the  destruction  of  which  is  furnished. 
National  banks  in  the  seventeen  largest  cities  of  the  United  States  are 

*  By   the    Federal    Reserve   Act   of   December  23,    1913,   this  regulation  has  been  made 
optional. 


142  COMMERCIAL  LAW 

required  to  keep  on  hand,  money  equal  to  25%  of  their  circula- 
ting notes  and  deposits.  National  banks  of  all  other  places  are 
required  to  keep  on  hand,  money  equal  to  15%  of  their  circulating 
notes  and  deposits.  National  banks  are  not  permitted  to  make  loans 
on  real  estate  or  on  their  own  stock,  except  to  protect  loans  already 
made.  In  case  of  insolvency  of  a  national  bank,  the  stocldiolders  are 
liable  in  an  amount  equal  to  the  par  value  of  their  stock,  in  addition 
to  their  liability  to  pay  the  par  value  of  their  stock  subscriptions. 
The  shareholders  having  legal  title  to  the  stock  at  the  time  of  insol- 
vency of  the  bank  are  the  ones  liable  for  the  additional  liability. 
National  banks  may  charge  the  rate  of  interest  authorized  by  statute 
of  the  state  where  the  bank  is  located.  If  unlawful  interest,  called 
usury,  is  charged,  the  bank  forfeits  the  entire  interest.  If  the  usurious 
interest  has  been  paid  by  the  borrower,  double  the  amount  of  the 
usury  may  be  recovered  from  the  bank  by  the  borrower. 

National  banks  are  authorized  to  buy  drafts  and  notes,  to  dis- 
count commercial  paper,  to  borrow  and  loan  money,  to  deal  in  govern- 
ment bonds,  to  loan  money  on  collateral,  but  not  to  guarantee  or 
indorse  commercial  paper,  except  in  the  transaction  of  their  legitimate 
business.  They  are  permitted  to  discount  or  purchase  bills  and  notes, 
but  not  to  charge  more  than  the  legal  rate  of  interest,  even  though 
the  paper  is  purchased.  They  may  charge  reasonable  rates  for  ex- 
change in  addition  to  interest. 

160.  Savings  Bank  and  Trust  Companies.  All  banks  other 
than  national  are  organized  under  state  laws,  and  are  known  as  state 
hanks.  The  most  common  kinds  of  state  banks  are  savings  banks 
and  trust  companies.  Savings  banks  ordmarily  receive  money  for 
safe  keeping,  acknowledging  receipt  by  entering  deposits  in  a  pass 
book  which  the  depositor  presents  upon  making  deposits,  and  upon 
withdrawal  of  funds.  Upon  drawing  funds,  the  amount  is  deducted 
from  the  balance  shown  in  the  pass  book  and  the  balance  brought 
down.  Savings  banks  ordinarily  do  not  permit  depositors  to  draw 
checks  against  their  accounts.  They  are  required  to  present  their 
pass  books  in  person,  or  to  give  them  to  an  agent  or  payee  designated 
in  a  wT-itten  order  to  be  presented  in  withdrawing  deposits.  If  pass 
books  are  lost,  savings  banks  are  not  obliged  to  pay  deposits  unless 
indemnified  against  loss  by  the  depositor.  Savings  banks  are  per- 
mitted to  make  loans  on  real  estate. 


COMMERCIAL  LAW  143 

Trust  companies  usually  have  all  the  power  of  savings  banks 
with  the  added  power  to  act  in  trust  capacities  as  trustees  of  estates 
and  for  bond  holders,  as  executors,  etc.  They  usually  do  a  checking 
business  for  the  accommodation  of  their  depositors. 

161.  Clearing  Houses.  A  clearing  house  is  an  association  of 
banks  of  a  certain  locality,  usually  of  a  city,  organized  for  the  con- 
venience of  its  members  in  making  settlements  with  each  other.  As 
a  matter  of  practice,  holders  of  checks  do  not  personally  present  them 
for  payment  at  the  banks  on  which  they  are  drawn,  but  deposit  them 
with  the  bank  with  which  they  do  business.  These  banks  collect 
them  from  the  banks  on  which  they  are  drawn.  Each  day,  a  city  bank 
has  deposited  with  it  a  large  number  of  checks  drawn  on  other  banks 
of  the  same  city.  It  would  involve  much  labor  to  present  these  checks 
for  payment  on  the  banks  on  which  they  are  drawn,  and  secure  cur- 
rency or  checks  therefor.  For  convenience,  banks  organize  clearing 
houses  for  the  purpose  of  making  daily  exchanges,  with  each  other,  of 
checlvs.  If  Bank  A  has  deposited  with  it  $1,000.00  of  checks  on  Bank 
B,  and  Bank  B  has  deposited  with  it  SI, 100. 00  of  checks  on  Bank  A, 
the  agents  of  the  two  banks  meet  at  the  clearing  house,  and  exchange 
checks  and  Bank  A  pays  Bank  B  the  difference  between  the  total 
amount  of  checks  exchanged,  or  SIOO.OO.  If  the  membership  of  the 
association  consists  of  twenty-five  banks,  the  principle  is  the  same,  the 
members  exchange  checks  and  pay  each  other  the  difference  in  amount. 
Clearing  houses  have  rules  by  which  members  are  required  to  return 
checks  not  properly  drawn,  over-drafts,  forged  paper,  etc.  within  a 
certain  time  to  the  paying  bank,  or  be  precluded  from  raising  objec- 
tions to  the  clearing  house  balance. 

162.  Money.  Ordinarily  the  term,  money,  is  used  to  designate 
any  medium  accepted  by  a  seller  from  a  purchaser  in  the  sale  of  prop- 
erty. It  is  the  thing  that  passes  current  among  business  men  in 
their  dealings  with  each  other.  Bank  notes,  checks,  gold  and  silver, 
nickel  and  copper  coin,  as  well  as  United  States  certificates,  are  money. 
Money  is  sometimes  used  to  designate  legal  tender.  Legal  tender  is 
the  medium  of  exchange  which  creditors  are  obliged  by  law  to  accept 
in  payment  of  debts.  United  States  notes,  except  for  duties  and 
interest  on  public  debts,  and  gold  certificates  are  legal  tender.  Gold 
coin  and  silver  dollars  are  legal  tender.  Subsidiary  silver  coin,  or 
half  dollars,  quarters  and  dimes,  in  amount  not  exceeding  ten  dollars 


144  COMMERCIAL  LAW 

are  legal  tender.  Nickels  and  pennies  are  legal  tender  in  amount  not 
exceeding  twenty-five  cents.  Silver  certificates  and  national  bank 
notes  are  not  legal  tender. 

163.  Discount.  Discount  is  money  paid  in  advance  for  the 
use  of  money.  It  is  interest  paid  in  advance.  One  of  the  primary 
functions  of  banks  is  to  discount  negotiable  paper.  The  states 
generally  have  laws  fixing  the  legal  and  maximum  rates  of  interest. 
If  banks  or  individuals  charge  interest  in  excess  of  these  rules,  they 
subject  themselves  to  the  fixed  penalties.  In  connection  with  usury 
laws,  some  confusion  has  arisen  as  to  what  constitutes  a  purchase  and 
what  constitutes  a  discount.  A  person  is  permitted  to  make  contracts 
and  make  as  large  a  profit  as  possible,  if  no  fraud  is  used.  If  the  con- 
tract involves  the  purchase  of  a  negotiable  instrument,  as  distinguished 
from  a  loan  of  money,  he  may  make  as  large  a  profit  as  he  is  able.  If 
X  desires  to  borrow  $100.00  of  Y  and  Y  gives  him  the  money  and 
takes  X's  promissory  note,  Y  can  deduct  only  the  lawful  rate  of  in- 
terest. If,  however,  X  holds  Z's  promissory  note  indorsed  in  blank, 
or  payable  to  bearer,  Y  may  purchase  the  note  from  X  for  any  price 
he  is  able,  and  if  he  makes  half  the  face  value  of  it  by  the  transaction, 
it  is  regarded  as  a  sale,  and  not  as  a  loan.  This  transaction  does  not 
come  within  the  usury  laws.  A  bank,  however,  by  the  weight  of 
authority  is  not  permitted  to  make  purchases  of  notes  in  this  sense 
The  purchase  above  described,  if  made  by  a  bank,  would  be  regarded 
as  usurious.  Banks  may  purchase  notes  if  so  authorized  by  their 
charter,  but  may  not  charge  more  than  the  lawful  rate  of  interest  as 
profit. 

164.  Exchange.  Exchange  is  the  term  applied  to  methods  of 
cancelling  debts  and  credits  between  persons  of  different  places.  If 
X,  in  Cleveland,  owes  7.  in  New  York,  $100.00,  and  Z,  in  New  York, 
owes  X,  in  Cleveland,  $100.00,  it  is  cheaper  and  safer  for  X  to  send  Y 
an  order  on  Z  for  $100.00  than  to  send  legal  tender  from  Cleveland  to 
New  York.  This  transaction  is  called  exchange.  If  made  between 
persons  of  the  same  country,  it  is  called  domestic  exchange;  if  between 
persons  of  different  countries,  it  is  called  foreign  exchange.  Banks 
of  one  city  keep  deposits  in  other  cities  for  the  purpose  of  selling 
drafts  thereon  to  customers. 

165.  Interest.  Interest  is  the  money  paid  for  the  use  of  money. 
Most  states  have  statutes  fixing  the  rate  of  interest  in    transactions 


COMIVIERCIAL  LAW  145 

where  no  rate  is  specified,  and  fixing  the  highest  rate  that  may  be  agreed 
upon.     The  following  are  the  rates  of  interest  in  the  different  states: 


States. 

Where  no  rate  is 

Highest  rate  that  may 

agreed  upon. 

be  agreed  upon. 

Alabama 

8% 

8% 

Alaska 

8% 

12% 

Arizona 

6% 

any  rate 

Arkansas 

6% 

10% 

California 

7% 

any  rate 

Colorado 

8% 

any  rate 

Connecticut 

6% 

15% 

Delaware 

6% 

6% 

District  of  Columbia 

6% 

10% 

Florida 

8% 

10% 

Georgia 

7% 

8% 

Idaho 

7% 

12% 

Illinois 

5% 

7% 

Indiana 

6% 

8% 

Iowa 

6% 

8% 

Kansas 

6% 

10% 

Kentucky 

6% 

6% 

Louisiana 

5% 

8% 

Maine 

6% 

any  rate 

Maryland 

6% 

6% 

Massachusetts 

6% 

any  rate 

Michigan 

5% 

7% 

Minnesota 

6% 

10% 

Mississippi 

6% 

10% 

Missouri 

6% 

8% 

Montana 

8% 

any  rate 

Nebraska 

7% 

10% 

Nevada 

7% 

any  rate 

New  Hampshire 

6% 

6% 

New  Jersey 

6% 

6% 

New  Mexico 

6% 

12% 

New  York 

6% 

6% 

North  Carolina 

6% 

6% 

North  Dakota 

7% 

12% 

Ohio 

6% 

8% 

Oklahoma 

6% 

10% 

Oregon 

6% 

10% 

Pennsylvania 

6% 

any  rate 

Rhode  Island 

6% 

any  rate 

South  Carolina 

7% 

8% 

South  Dakota 

7% 

12% 

Tennessee 

6% 

6% 

Texas 

6% 

10% 

Utah 

8% 

12% 

Vermont 

6% 

6% 

146  COMMERCIAL  LAW 


States. 

Where  no  rate  is 

Highest  rate  that  may 

agreed  upon. 

be 

agreed  upon. 

Virginia 

6% 

6% 

Washington 

6% 

12% 

West  Virginia 

6% 

6% 

Wisconsin 

6% 

10% 

Wyoming 

8% 

12% 

166.  Usury,  Usury  is  the  term  applied  to  interest  charged  in 
excess  of  the  rate  allowed  by  law.  The  states  differ  in  the  rate  fixed 
by  statute  as  the  legal  rate.  The  most  common  penalty  fixed  by 
statute  of  the  different  states,  is  forfeiture  of  all  interest. 

INSURANCE 

167.  Insurance  Defined.  Insurance  is  the  name  applied  to  a 
contract,  by  the  terms  of  which  one  party,  in  consideration  of  a  certain 
sum  of  money,  agrees  to  protect  another  to  a  certain  specified  degree 
against  injuries  or  losses  arising  from  certain  perils.  The  kinds  of 
insurance  are  almost  as  numerous  as  the  kinds  of  perils  to  which 
persons  or  property  may  be  subjected.  The  nature  of  insurance 
contracts  are  such  that  legislatures  of  the  states  have  the  power  to 
define  what  classes  of  persons  may  engage  in  the  insurance  business. 
Some  states  provide  by  statute  that  only  incorporated  companies 
shall  transact  the  business  of  writing  insurance  policies,  and  that  these 
companies  shall  be  subject  to  stringent  state  super\'ision  and  inspec- 
tion. States  have  the  right  to  stipulate  upon  what  terms  foreign  in- 
surance companies  shall  have  the  right  to  transact  business  within 
their  borders,  and  may  exclude  them  from  transacting  business  if 
they  refuse  to  comply  with  such  provisions.  The  United  States 
Constitution  provides  that  interstate  commerce  shall  be  under  the 
control  of  United  States  Congress.  The  Supreme  Court  of  the  United 
States  has  decided  that  insurance  business  is  not  interstate  commerce. 
Therefore  the  states  may  determine  upon  what  terms  insurance  com- 
panies may  transact  business  within  their  territory.  Unincorporated 
companies  as  well  as  individuals  may  engage  in  the  business  of  writing 
insurance,  if  it  is  not  provided  otherwise  by  statute. 

168.  Nature  of  Insurance  Contract.  An  insurance  policy  is  a 
contract  requiring  competent  parties,  mutuality,  consideration  and 
all  the  elements  necessary  to  make  any  kind  of  a  contract.  An  insur- 
ance contract  is  peculiar  in  that  it  binds  the  insurer  to  pay  damages 
for  losses  or  injuries  arising  out  of  uncertain  perils  or  hazards.     It  is 


COMIMERCIAL  LAW  147 

in  the  nature  of  a  gambling  transaction.  A  large  number  of  persons 
pool  a  portion  of  their  assets,  in  order  to  pay  losses  of  a  certain  char- 
acter likely  to  befall  only  a  small  portion  of  the  persons  entering  into 
the  pool.  For  example,  if  ten  thousand  persons  pay  one  dollar  each 
to  establish  a  common  fund  to  protect  the  members  against  losses 
from  fire,  they  do  so  under  the  belief  and  expectation  that  but  few  of 
the  number  ever  will  sustain  loss  from  the  peril  of  fire.  An  insurance 
contract  is  so  closely  akin  to  a  gambling  contract  that  persons  are  not 
permitted  to  take  insurance  on  property,  or  upon  the  lives  of  persons, 
unless  they  have  an  individual  interest,  which  they  should  have  a  pur- 
pose or  interest  in  protecting  outside  of  a  mere  disposition  to  wager. 
This  interest  is  called  insurable  interest  and  is  discussed  under  a  sepa- 
rate section.  It  is  true  that  many  kinds  of  life  insurance  policies 
protect  against  death,  and  that  death  is  an  event  certain  to  occur  to 
the  insured,  but  the  real  purpose  of  the  policy  is  to  give  protection 
against  the  uncertainty  of  the  time  of  death.  The  uncertainty  of  the 
thing  sought  to  be  protected  against  is  as  great  in  life  insurance  as  in 
any  kind  of  insurance. 

169.  Parties  to  Insurance  Contracts.  Primarily  there  are  only 
two  parties  to  an  insurance  contract,  the  party  to  be  paid  for  the  loss, 
in  case  the  event  insured  against  occurs,  who  is  called  the  insured, 
and  the  party,  who  for  a  consideration  agrees  to  pay  an  amount  cer- 
tain, or  to  be  determined  upon  the  happening  of  the  uncertain  event. 
This  party  is  called  the  insurer  or  underwriter.  In  many  insurance 
contracts,  a  third  party  is  interested.  For  example,  A  may  insure  his 
life  in  B  Co.,  for  the  benefit  of  his  wife,  C.  C  may  have  nothing  to  do 
with  the  contract  except  being  named  as  beneficiary  thereunder. 
She  pays  nothing  for  this  benefit.  It  is  a  contract  made  for  her 
benefit.  After  she  has  been  made  beneficiary,  A  cannot  change 
beneficiaries  without  the  consent  of  C.  In  case  of  C's  death,  A  may 
voluntarily  name  another  beneficiary.  If  A  is  indebted  to  B, 
and  B,  considering  A  insolvent,  desires  to  secure  the  debt  by 
taking  out  a  policy  of  insurance  on  A 's  life  in  the  C  company,  he 
cannot  take  out  such  a  policy  without  the  consent  of  A.  While  a 
third  person  may  be  interested  in  an  insurance  contract,  or  his  con- 
sent may  be  necessary  before  the  contract  can  be  made,  there  are 
primarily  only  two  parties  to  the  contract,  the  insured  and  the 
insurer. 


148  COMMERCIAL  LAW 

170.  Kinds  of  Insurance.  Probably  the  first  kind  of  insurance 
written  was  marine.  The  next  kind  was  fire;  this  was  followed  by 
life  insurance,  and  this  in  turn,  by  the  many  varieties  of  modern  in- 
surance covering  almost  all  kinds  of  hazards  imaginable.  The 
following  kinds  of  insurance  are  in  common  use:  marine,  fire,  life, 
accident,  tornado,  graveyard,  fraternal,  fidelity,  boiler,  credit,  guaranty 
title,  plate  glass,  mutual  benefit,  employer's  liability,  hail,  hurricane 
and  health.  No  attempt  is  here  made  to  discuss  all  the  different 
kinds  of  insurance.  An  endeavor  is  made  to  discuss  some  of  the 
fundamental  legal  principles  connected  with  the  most  common  kinds 
of  insurance.     These  principles  apply  to  all  kinds  of  insurance. 

171.  Insurable  Interest.  Courts  refuse  to  recognize  the  validity 
of  insurance  contracts,  unless  the  party  taking  the  insurance  has  a 
pecuniary  interest,  present  or  reasonably  expected,  in  the  life  or 
property  insured.  Such  an  interest  is  known  in  law  as  an  insurable 
interest.  Insurable  interest  cannot  be  exactly  defined.  It  depends 
upon  the  circumstances  surrounding  each  particular  case.  Some 
things  have  been  decided  by  the  courts  to  constitute  an  insurable 
interest.  Cases  are  continually  arising,  however,  which  present  new 
features  which  must  be  decided  upon  their  merits.  Insurable  interest 
can  only  be  described,  it  cannot  exactly  be  defined.  It  is  sometimes 
said  to  be  a  money  or  pecuniary  interest  possessed,  or  reasonably 
expected,  by  the  party  entering  into  the  insurance  contract.  A  father 
may  insure  the  life  of  his  child,  of  his  wife,  or  his  servant  under  con- 
tract for  a  period  of  service.  A  party  cannot,  however,  insure  the  life 
of  a  person  with  whom  he  is  in  no  way  connected  by  close  blood 
relationship,  or  upon  whom  he  does  not  depend  for  present  or  future 
support.  Such  a  contract  is  regarded  as  a  mere  wager,  which  a 
sound  public  policy  refuses  to  enforce,  or  even  to  recognize  as  valid. 
A  person  may  insure  a  growing  crop,  and  the  life  of  animals  owned 
by  him.  A  mortgagee,  mortgager  or  pledgee  of  property  may  insure 
the  property.  A  creditor  may  insure  the  life  of  his  debtor;  a  person 
may  insure  his  property  against  robbery.  In  fact  a  person  may 
insure  the  life  of  a  person  or  any  property  belonging  to  him  or  to  an- 
other, the  loss  of  which  will  cause  him  a  pecuniary  loss. 

In  case  of  life  insurance  policies,  if  there  is  an  insurable  interest 
at  the  time  the  insurance  contract  is  made,  the  policy  is  valid,  even 
though  the  insurable  interest  afterwards  ceases.     Any  relationship. 


COMMERCIAL  LAW  149 

either  by  blood  or  marriage,  close  enough  to  make  it  of  pecuniary 
advantage  to  the  party  taking  the  insurance  to  have  the  insured  con- 
tinue to  live,  is  regarded  sufficient  to  constitute  an  insurable  interest. 
It  has  been  held  that  a  brother  has  no  insurable  interest  in  the  life  of 
his  brother,  nor  a  granddaughter  in  the  life  of  her  grandfather,  nor  a 
son-in-law  in  the  life  of  his  mother-in-law.  A  parent,  however,  has 
an  insurable  interest  in  the  life  of  his  child  or  wife;  or  a  grand- 
daughter in  the  life  of  her  grandfather  if  she  depends  upon  hira  for 
her  support.  A  person  may  insure  his  own  life  or  property  in  favor 
of  any  one  else.  The  question  of  insurable  interest  arises  only  in 
case  one  endeavors  to  insure  the  life  of  another,  or  the  property  of 
another  in  which  one  has  only  a  slight  interest. 

172.  Forms  of  Insurance  Contract.  The  states  generally  pro- 
vide by  statute,  that  to  be  enforceable,  contracts  to  answer  for  the 
debt,  default  or  obligation  of  another,  shall  be  in  writing  (See 
Statute  of  Frauds,  chapter  on  Contracts.)  The  courts  have  decided 
that  an  insurance  contract  is  not  a  contract  to  answer  for  the  debt, 
default  or  obligation  of  another,  but  a  direct  contract  by  which  the 
insurance  company  for  a  consideration  agrees  to  pay  its  own  debt  in 
case  of  loss  on  the  part  of  the  insured.  Insurance  contracts  need  not 
be  in  writing.  Oral  contracts  of  insurance  like  other  simple  con- 
tracts are  binding  upon  the  parties  thereto.  For  example,  A,  repre- 
senting an  insurance  company,  meets  B,  and  agrees  orally  to  insure 
B's  house  from  twelve  o'clock  of  a  certain  day,  and  accepts  the  premium 
for  one  year's  insurance.  The  house  burns  the  evening  of  the  day 
after  the  insurance  is  to  become  effective.  A's  insurance  company  is 
bound  by  the  oral  contract  of  insurance.  If  A  is  not  permitted  by 
his  company  to  make  oral  contracts  of  insurance,  and  A  so  tells  B, 
or  if  B  knows  of  this  fact,  the  contract  is  not  binding,  since  A  acts 
without  authority.  If  A  meets  B  on  Monday,  and  orally  agrees  to 
procure  for  him  a  written  policy  of  insurance  on  B's  house  to  take 
effect  from  Monday  noon,  and  B's  house  burns  Tuesday  morning,  A 
having  failed  to  procure  the  written  policy  of  insurance  for  B,  the 
insurance  company  is  not  liable  to  B  for  the  loss.  B  had  a  contract 
with  A  by  the  terms  of  which  A  promised  to  procure  a  policy  of  in- 
surance for  B.  A  did  not  orally  promise  to  insure  the  house  for  B. 
B  has  an  action  for  damages  against  A,  but  not  an  action  on  a  con- 
tract of  insurance  against  the  company. 


150  COMMERCIAL  LAW 

Insurance  agents  are  often  authorized  to  issue  receipts,  called 
hinders,  to  the  effect  that  insurance  has  been  contracted  by  a  party 
from  a  certain  time.  These  binders  constitute  sufficient  evidence  to 
enable  the  insured  to  enforce  his  contract  of  insurance.  Agents  are 
sometimes  authorized  to  enter  a  memorandum  in  their  books  of  insur- 
ance, called  entries  in  their  binding  books.  These  constitute  suffi- 
cient evidence  of  the  formation  of  a  contract  between  insurer  and 
insured,  to  enable  the  latter  to  enforce  his  contract  in  case  of  loss. 

173.  Warranties  and  Representations  in  Insurance  Contracts. 
The  term,  warraniy  is  commonly  used  in  connection  with  contracts 
of  sales  of  personal  property,  where  it  is  used  to  designate  a  collateral 
contract  connected  with  the  principal  contract  in  question.  In  con- 
nection with  insurance  contracts,  it  means  a  statement  or  stipulation 
which,  by  reference  or  express  term,  is  itself  made  a  part  of  the  con- 
tract of  insurance.  The  principal  distinction  between  a  warranty  in 
connection  with  sale  of  personal  property,  and  in  connection  with 
contracts  of  insurance,  is  that  in  the  former  case,  breach  of  warranty 
usually  does  not  discharge  the  contract,  but  simply  gives  rise  to  an 
action  for  damages,  while  in  case  of  contracts  of  insurance,  breach  of 
warranty  discharges  the  contract  itself.  Life  insurance  companies 
generally  require  formal  written  application  by  which  the  applicant 
for  insurance  is  required  to  answer  questions.  These  questions  and 
answers  are  made  a  part  of  the  policy  or  contract  of  insurance,  either 
by  reference,  or  by  incorporation,  and  become  warranties.  If  they 
are  not  true,  the  policy  may  be  avoided  by  reason  thereof.  To  con- 
stitute a  warranty,  a  stipulation  must  be  made  a  part  of  the  insurance 
contract  either  by  direct  reference,  or  by  express  incorporation  therein. 
To  constitute  a  warranty,  the  contract  of  insurance  must  contain  a 
stipulation  that  the  statement  or  assertion  in  question  is  a  warranty. 
If  a  warranty  proves  false,  no  matter  if  innocently  made,  the  contract 
is  discharged  thereby.  Warranties  are  strictly  construed.  jMuch 
injustice  has  been  done  by  reason  of  warranties  in  insurance  contracts. 

Some  states  provide  by  statute,  that  neither  the  application  for 
insurance,  nor  the  rules  and  regulations  of  the  company  shall  be  con- 
sidered as  warranties  unless  expressly  incorporated  in  the  policy  as 
warranties.  A  distinction  is  made  between  representations  and  war- 
ranties. A  representation  is  a  statement  made  as  an  inducement  to 
enter  into  a  contract  of  insurance.     It  is  regarded  as  one  of  the  pre- 


COMINIERCIAL  LAW  151 

liminaries  to  the  contract  of  insurance  and  not  as  a  vital  part  of  the 
contract  itself.  If  a  representation  proves  not  to  be  true  in  some 
particular,  the  contract  of  insurance  is  not  discharged  by  reason  there- 
of. To  constitute  a  ground  for  avoiding  a  contract,  a  representation 
must  be  false,  fraudulent,  and  material  to  the  contract.  It  is  some- 
times said  that  a  warranty  is  a  stipulation  in  the  contract  of  insur- 
ance itself,  and  must  be  complied  with  whether  true  or  not,  while  a 
representation  is  usually  given  verbally,  or  in  a  separate  document, 
and  need  only  be  substantially  complied  with. 

In  case  of  doubt  as  to  whether  statements  are  representations  or 
warranties,  courts  incline  toward  treating  them  as  representations. 
Answers  to  questions  were  made  in  an  application  for  insurance  fol- 
lowed by  the  statement,  "The  above  are  true  and  fair  answers  to  the 
foregoing  questions  in  which  there  are  no  misrepresentations  or  sup- 
pression of  facts,  and  I  acknowledge  and  agree  that  the  above  state- 
ment shall  form  the  basis  of  the  agreement  with  the  insurance  com- 
pany." The  policy  of  insurance  did  not  state  that  these  questions 
were  incorporated  as  warranties.  In  a  suit  on  the  policy,  the  court 
held  the  answers  to  be  representations  and  not  warranties. 

174.  Life,  Term,  and  Tontine  Policies.  Lije  'policy  is  the  term 
applied  to  a  contract  of  insurance  payable  only  at  the  death  of  the 
insured.  Term  or  endowment  policy  is  the  term  applied  to  insurance 
payable  at  the  death  of  the  insured,  or  at  the  expiration  of  a  certain 
term  or  period  of  years,  if  the  insured  sur\'ives  such  period.  The 
term,  tontine  insurance,  is  the  name  applied  to  insurance  paid  out  of 
the  proceeds  of  unpaid  policies  during  a  certain  period  or  term.  If 
the  insured  survives  the  term,  and  pays  the  premium  he  benefits  by 
receiving  a  share  of  the  proceeds  received  from  the  policies  of  those 
members  who  do  not  sunave  the  period,  or  who  let  their  policies  lapse 
for  other  reasons.  The  term  is  taken  from  the  name  of  the  person 
who  devised  the  plan.  It  is  sometimes  called  cumulative  dividend 
insurance.     It  is  written  in  many  different  forms. 

175.  Marine  Insurance.  Contracts  of  insurance  against  injuries 
to  a  ship  or  cargo  at  sea  are  called  marine  insurance  contracts.  This 
is  the  oldest  form  of  insurance.  In  securing  insurance  of  this  char- 
acter, the  insured  impliedly  warrants  that  the  vessel  is  seaworthy. 
This  is  the  only  kind  of  insurance  in  which  there  is  an  Implied  war- 
ranty.   The  term  general  average  is  used  in  connection  with  marine 


152  COMMERCIAL  LAW 

insurance.  If  it  becomes  necessary  to  sacrifice  a  part  of  a  cargo  to 
save  the  balance,  the  owners  of  part  of  the  cargo  saved,  together  with 
the  owners  of  the  boat,  must  contribute  pro  rata  toward  the  loss  of  the 
party  whose  goods  are  sacrificed.  That  is,  all  owners  of  cargo  and  boat 
must  stand  the  loss  in  proportion  to  their  holdings.  The  one  whose  goods 
are  sacrificed  is  placed  in  no  better  or  worse  situation  than  the  others. 

176.  Standard  Policies.  Some  states  require  by  statute,  that 
insurance  companies  issue  policies,  the  terms  of  which  are  fixed  by 
statute.  This  gives  the  insured  the  benefit  of  a  uniform  policy,  the 
terms  of  which  are  easily  comprehended,  and  which  are  the  same  in 
all  cases.    These  statutory  policies  are  known  as  standard   policies. 

177.  Suicide  Clauses.  Contracts  of  insurance  frequently  con- 
tain the  stipulation  that  the  contract  shall  be  void  if  the  insured  sui- 
cides. This  stipulation  is  enforceable  if  it  can  be  proven  that  the 
insured  suicided  while  sane.  It  is  generally  held  to  be  unenforceable 
if  the  insured  suicided  while  insane.  An  insurance  company  may 
stipulate  that  the  contract  shall  be  void  if  the  insured  suicides  when 
either  sane  or  insane.  Such  a  stipulation  is  enforceable.  The  ordinary 
insurance  contract,  however,  which  contains  any  suicide  clause  pro- 
vides against  suicide  only,  and  does  not  contain  any  stipulation  as  to 
the  sanity  of  the  insured  at  the  time  he  commits  the  act.  It  is  usually 
held  that  the  burden  is  upon  the  insurance  company  to  prove  that  the 
insured  was  sane  at  the  time  he  committed  suicide.  If  a  policy  con- 
tains no  suicide  clause  whatever,  suicide  will  not  avoid  the  policy 
unless  it  is  proven  that  the  purpose  of  the  suicide  was  to  defraud  the 
insurance  company.  If  it  is  proven  that  one  takes  out  a  policy  of 
insurance  with  the  intent  to  commit  suicide,  the  policy  is  not  enforce- 
able in  case  of  suicide. 

178.  Fidelity  and  Casuality  Insurance.  Contracts  of  insurance 
by  which  the  honesty  and  faithfulness  of  agents  and  employees  are 
insured  are  termed  fidelity  insurance  contracts.  A,  a  bank,  employs 
B  as  clerk.  A  requires  B  to  furnish  a  bond,  by  the  terms  of  which 
the  signers  of  the  bond  agree  to  pay  A  for  any  losses  arising  from  B's 
dishonesty  or  carelessness.  This  bond  or  contract  is  known  as  a 
fidelity  insurance  contract. 

Insurance  contracts  providing  against  losses  arising  out  of  acci- 
dents to  property  are  termed  casualty  insurance.  Losses  by  theft  or 
burglary,  or  from  steam  boiler  explosions  are  common  examples. 


COMMERCIAL  LAW  153 

179.  Re=insurance.  One  insurance  company  may  insure  its 
own  liability  upon  policies  issued,  by  entering  into  separate  contracts 
covering  the  same  risks  with  other  insurance  companies.  For  ex- 
ample, A,  an  insurance  company,  insures  B's  factory  for  $1,000.00. 
A  may  in  turn  insure  its  liability  to  B,  by  entering  into  a  contract  with 
C,  another  insurance  company,  by  the  terms  of  which  C  agrees  to 
insure  A  against  loss  upon  A's  contract  with  B.  A  is  not  permitted 
to  bind  C  by  a  greater  responsibility  than  A  is  bound  to  B.  In  case 
B's  factory  is  burned,  in  the  absence  of  express  stipulation  to  the  con- 
trary, A  may  recover  from  C  regardless  of  whether  he  has  first  paid  B. 
Even  though  A  is  insolvent  and  unable  to  pay  B,  this  is  no  defense  to 
C  on  his  contract  with  A .  C  must  pay  A  regardless  of  the  insolvency 
oi  A.  In  case  B  has  a  fire  and  A  settles  with  him  for  S500.00,  C  is 
liable  to  A  for  only  S500.00.  That  is  C's  liability  to  A  is  the  same  as 
A's  liability  to  B,  unless  by  the  terms  of  the  re-insurance,  C  assumes 
only  a  portion  of  A's  liability  to  B.  In  this  event  C  must  pay  A  the 
pro  rata  share  of  A's  liability  to  B.  B  in  no  event  has  any  rights 
against  C.  B's  contract  is  with  A,  and  the  fact  that  A  has  entered 
into  a  contract  with  C  involving  the  same  subject  matter,  gives  B  no 
rights  against  C. 

180.  Assignment  of  Insurance  Policies.  By  assignment,  is 
meant  a  sale  or  transfer  of  some  intangible  interest  by  one  person  to 
another  for  a  valuable  consideration.  In  case  of  insurance  contracts 
other  than  life,  no  real  assignment  can  be  made.  The  person  whose 
property  is  insured  is  the  one  who  really  benefits  by  the  contracts  of 
insurance.  Before  loss,  an  attempted  assignment  of  the  insurance 
policy  amounts  merely  to  a  designation  of  the  person  to  whom  the 
insurance  is  to  be  paid.  In  case  of  loss,  the  original  party  insured 
still  holds  the  property  insured  or  the  insurable  interest,  and  any 
breach  of  the  insurance  contract  on  his  part  avoids  the  contract.  A 
policy  of  insurance  cannot  be  assigned  without  the  consent  of  the 
insurance  company.  If  an  attempt  is  made  to  transfer  an  insurance 
policy  other  than  life,  before  loss,  without  the  transfer  of  the  property 
itself,  the  transaction  does  not  amount  to  an  assignment,  but  amounts 
to  a  contract  between  the  seller  and  buyer,  by  which  the  latter  is  entitled 
to  receive  the  proceeds  of  the  policy  if  any  ever  arises.  So  far  as  the 
insurance  company  is  concerned,  acts  of  the  seller  after  the  attempted 
assignment  are  as  complete  a  defense  as  before.     If  the  property 


154  COMMERCIAL  LAW 

insured  as  well  as  the  insurance  policy  is  transferred  to  another,  with 
consent  of  the  insurance  company,  this  is  not  an  assignment,  but 
amounts  to  a  new  contract  between  the  insurance  company  and  the 
purchaser.  After  a  loss  has  occurred,  the  right  of  the  insured  against 
the  insurance  company  amounts  to  a  debt,  which  may  be  assigned  the 
same  as  an  ordinary  debt. 

In  case  of  life  insurance,  if  a  third  party  has  been  named  as  bene- 
ficiary, he  is  supposed  to  have  such  an  interest  in  the  policy  that  a 
change  of  beneficiary  cannot  be  made  nor  can  an  assignment  of  the 
policy  be  made  without  his  consent.  In  case  the  proceeds  of  a  life 
insurance  policy  are  payable  to  the  insured  himself,  or  to  his  estate, 
the  policy  may  be  assigned  at  the  will  of  the  insured.  If  the  policy 
provides  against  assignment,  it  cannot  be  assigned.  Otherwise,  it 
may  be  transferred  as  collateral  security,  or  sold  outright  at  the  will 
of  the  insured. 

181.  Open  and  Valued  Policies,  and  Other  Insurance.  Policies 
or  contracts  of  insurance  are  said  to  be  valued  or  open,  depending 
upon  whether  the  amount  to  be  paid  in  case  of  loss  is  agreed  upon  in 
advance.  Life  insurance  policies  are  examples  of  valued  policies. 
The  insurance  company  agrees  to  pay  a  certain  fixed  amount  in  case 
of  death  of  the  insured,  or  at  a  certain  time.  Fire  insurance  policies 
usually  are  open  policies.  The  insurance  company  agrees  to  pay  the 
amount  the  insured  loses  by  fire  which  destroys  or  injures  certain 
specified  property.  The  fact  that  a  limit  is  placed  upon  the  liability 
of  the  insurance  company  does  not  make  the  policy  valued.  If,  how- 
ever, the  insurance  company  agrees  to  pay  a  certain  fixed  amount  in 
case  of  loss  by  fire  the  policy  is  valued. 

A  person  may  take  as  much  insurance  upon  his  life  as  he  pleases, 
so  long  as  he  reveals  the  facts  to  the  companies  with  whom  he  con- 
tracts. In  case  of  insuring  property,  the  insurer  is  not  permitted  to 
recover  in  excess  of  the  value  of  the  property,  regardless  of  the  amount 
of  insurance  he  carries.  If  an  insurer  takes  out  a  policy  of  insurance 
upon  property  already  insured,  he  must  not  conceal  this  fact  from  the 
subsequent  insurer.  The  second  policy  will  provide  for  payment, 
in  case  of  loss  in  excess  of  the  first  insurer's  liability,  but  not  in  excess 
of  the  value  of  the  property.  Or  it  will  provide  that  in  case  of  loss 
each  policy  shall  share  the  loss  in  the  proportion  that  the  amounts  of 
the  policies  bear  to  the  loss. 


COMMERCIAL  LA^Y  155 

SURETYSHIP 

182.  Nature  of  Contracts  to  Answer  for  the  Debt  of  Another. 

In  the  transaction  of  business,  many  contracts  are  made  to  answer  for 
the  debt  or  obhgation  of  another,  as  distinguished  from  the  direct 
debt  or  obligation  of  the  person  entering  into  the  contract.  These 
contracts  are  made  for  the  purpose  of  adding  security  to  the  original 
contract,  or  for  the  purpose  of  enabling  the  original  obligor  to  obtain 
credit.  The  general  term  applied  to  contracts  to  answer  for  the  debts 
of  another  is  suretyship.  The  arrangement  by  which  one  party  agrees 
to  answer  for  the  debt  or  obligation  of  another  is  a  contract.  This 
kind  of  a  contract  requires  all  the  elements  of  any  contract.  There 
must  be  a  meeting  of  the  minds  of  the  contracting  parties,  considera- 
tion, etc.  If  A  purchases  goods  from  B,  agreeing  to  pay  $100.00  for 
them,  A's  obligation  to  pay  B  SlOO.OO  is  a  primary  one  arising  out  of  a 
simple  contract.  If  A  purchases  goods  from  B  agreeing  to  pay 
SlOO.OO  therefor,  and  C,  as  a  part  of  the  same  transaction,  makes 
a  promise  in  writing  to  B,  to  pay  the  SlOO.OO  if  A  does  not  pay,  C's 
obligation  is  one  of  suretyship.  He  is  known  in  law  as  a  guarantor. 
His  contract  is  to  pay  the  debt  of  another.  He  has  agreed  to  pay  A's 
debt  if  A  fails  to  pay  it.  Any  contract  by  which  a  person  agrees  to 
answer  for  the  debt  or  default  of  another,  no  matter  what  its  form 
may  be,  or  by  what  technical  name  it  may  be  known,  is  a  contract  of 
suretyship. 

183.  Kinds  of  Suretyship  Contracts  and  Names  of  Parties  Thereto. 
The  term,  suretyship,  is  the  general  or  descriptive  term  applied  to  all 
contracts  by  which  one  person  agrees  to  answer  for  the  debt  or  obliga- 
tion of  another.  It  may  be  in  the  form  of  a  contract  of  a  surety,  a 
contract  of  a  guarantor,  or  a  contract  of  an  indorser.  There  are  at 
least  three  parties  to  all  suretyship  contracts;  the  party  whose  debt 
is  secured,  called  the  principal;  the  one  to  whom  the  debt  is  owed, 
called  the  creditor;  and  the  one  promising  to  pay  the  debt  of  another, 
called  the  promisor.  For  example,  if  A,  orders  one  thousand  dollars' 
worth  of  merchandise  from  B,  and,  as  a  part  of  the  transaction,  C 
promises  to  pay  the  amount  for  A,  when  due,  if  A  fails  to  pay  it,  the 
transaction  is  one  of  suretyship  in  which  A  is  principal,  B,  creditor, 
and  C,  promisor.  A  promisor  may  be  a  surety,  a  guarantor,  or  an 
indorser  of  a  negotiable  instrument.  ^Miether  a  promisor  is  a  surety, 
a  guarantor,  or  an  indorser  depends  upon  the  particular  kind  of  a 


156  COMMERCIAL  LAW 

contract  made.  In  any  event  it  is  a  promise  to  pay  the  debt  of  an- 
other. But  the  conditions  and  terms  of  the  agreement  may  make  it 
that  of  a  surety,  a  guarantor  or  an  indorser.  The  distinguishing 
features  of  the  different  kinds  of  promisors  are  discussed  under 
separate  sections. 

184.     Contract  of  a  Surety.     A  surety  is  one  who  uncondi- 
tionally promises  to  answer  for  the  debt  or  obligation  of  another. 
For  example,  A  gives  the  following  promissory  note  to  S.- 
Chicago, 111.,  Jan.  2,  1908. 
■  Thirty  days  after  date  I  promise  to  pay  to  the  order  of  B — Five 

'  Hundred  Dollars, 

r  Signed — A. 

Signed — C,  Surety. 

This  note  constitutes  an  obligation  of  suretyship  in  which  B 
is  creditor,  A  is  principal,  and  C  is  surety.  C's  obligation  is  the  same 
as  that  of  A,  his  principal.  By  signing  this  note  as  surety,  C  binds 
himself  to  pay  the  note  when  due.  He  does  not  bind  himself  to  pay 
on  condition  that  A  does  not,  or  cannot  pay  the  note  when  due,  but 
binds  himself  to  pay  the  note  when  due.  His  obligation  is  the  same 
as  the  obligation  of  A.  His  obligation  is  not  conditioned  upon  A's 
failure  or  inability  to  pay.  \Mien  the  note  is  due,  B,  the  creditor, 
may  bring  suit  against  C,  the  surety,  disregarding  the  principal,  A. 
B  may  bring  suit  against  C,  the  surety,  without  making  any  demand 
of  payment  of  .4,  or  without  receiving  A's  refusal  to  pay.  If  the  note 
is  signed  by  C  as  above,  without  using  the  word,  surety  after  his  name, 
it  may  be  shown  by  oral  testimony  that  C  signed  as  surety,  if  such  is 
the  fact.  A  surety  may  sign  any  kind  of  a  contract  as  surety  for  an- 
other. In  this  event,  his  obligation  is  to  do  the  same  thing  that  his 
principal  contracts  to  do.  If  the  obligation  of  the  one  signing  as 
security  is  conditioned  upon  anything,  it  is  not  the  obligation  of  a 
surety,  but  that  of  a  guarantor,  no  matter  by  what  term  designated 
in  the  contract.  It  has  been  said  by  some  writers  that  a  surety 
promises  to  pay  the  debt  of  another  if  the  other  does  not,  and  a 
guarantor  promises  to  pay  the  debt  of  another  if  the  other  cannot. 
This  definition  is  not  correct  and  is  not  supported  by  the  cases.  This 
definition  applies  only  to  guarantors,  since  it  is  a  conditional  promise 
to  pay  the  debt  or  obligation  of  another.  A  surety's  obligation  is 
absolute,  and  not  conditional  in  any  way  upon  the  failure  or  inability 
of  the  principal  debtor  to  pay.    In  commercial  practice,  the  contract 


COMMERCIAL  LAW  137 

of  a  surety  is  infrequently  used  as  compared  with  the  obligation  of  a 
guarantor. 

185.  Contract  of  a  Guarantor.  Anyone  who  agrees  to  answer 
for  the  debt,  default,  or  obligation  of  another  upon  condition  that  the 
other  does  not  or  cannot  pay  the  debt,  or  upon  any  condition  what- 
ever, is  a  guarantor.  For  example,  A  gives  B  the  following  promis- 
sory note: 

Cleveland,  Ohio,  Nov.  27,  1909. 
Sixty  days  after  date,  I  promise  to  pay  B,  or  order,  One  Hundred 
Dollars. 

Signed — A. 

The  back  of  the  note  contains  the  following  statement : 

I  guarantee  the  payment  of  this  note  when  due. 

Signed— C. 

The  contract  of  C  is  that  of  a  guarantor.  If  A  fails  to  pay  the 
note  when  due,  and  B  demands  payment  of  A,  and  promptly  notifies 
C  oi  A's  failure  to  pay,  C  is  liable.  Technically,  C  need  not  be  noti- 
fied, but  it  is  good  business  practice  to  give  him  notice.  C's  liability 
depends  upon  A's  failure  to  pay  the  note  when  due.  C's  liability  is  a 
conditional  one  as  distinguished  from  the  liability  of  a  surety,  which 
is  absolute. 

Contracts  of  guaranty  are  commonly  used  in  commercial  affairs. 
In  obtaining  credit,  contracts  of  guaranty  are  common.  They  may 
be  used  apart  from  promissory  notes  or  negotiable  instruments.  Any 
kind  of  an  obligation  or  contract  of  another  may  be  guaranteed.  A 
retail  dry  goods  merchant  desires  to  purchase  $2,000.00  worth  of 
goods  from  B,  a  wholesaler.  B  does  not  know  A,  but  knows  C,  a 
friend  oi  A.  B  offers  to  sell  A  the  goods  on  credit,  on  condition  that 
A  furnish  him  a  letter  of  guaranty  signed  by  C.  A  furnishes  B  the 
following  guaranty,  signed  by  C : 

Mr.  B., 

New  York  City. 
On  condition  that  you  sell  A  an  order  of  goods  which  he  may 
select,  I  hereby  guarantee  the  payment  of  the  amount  thereof, 
not  to  exceed  $2,000.00  in  amount. 

Signed  C. 

By  this  contract,  C  binds  himself  to  pay  B  the  purchase  price  of 
the  goods,  not  exceeding  $2,000.00,  if  A  fails  to  pay  same. 

Contracts  of  guaranty  are  of  many  kinds.     They  are  frequently 


158  COMMERCIAL  LAW 

given  to  secure  contracts  of  personal  service,  for  the  construction  of 
buildings,  for  mercantile  transactions,  or  in  fact  for  any  kind  of  busi- 
ness transaction.  They  are  contracts,  and  must  contain  all  the  ele- 
ments of  a  simple  contract,  such  as  consideration,  mutuality,  com- 
petent parties,  etc.  If  a  contract  of  guaranty  is  given  at  the  time 
the  original  contract  is  made,  and  is  a  part  of  the  same  transaction, 
the  consideration  which  supports  the  original  contract  supports  the 
contract  of  guaranty.  Otherwise,  the  contract  of  guaranty  must  be 
supported  by  a  separate  consideration. 

186.  Contract  of  an  Indorser.  One  form  of  suretyship  obliga- 
tion, or  obligations,  to  answer  for  the  debt  or  default  of  another,  is  that 
of  an  indorser  to  a  negotiable  instrument.  The  contract  of  an  in- 
dorser differs  from  that  of  a  guarantor,  and  from  that  of  a  surety. 
For  example,  A  gives  the  following  promissory  note  to  B : 

Chicago,  111.,  Jan.  4,  1909. 

Ninety  days  after  date  I  promise  to  pay  to  the  order  of  B,  one 

thousand  dollars. 

Signed  A. 

B  indorses  the  note  by  writing  his  name  across  the  back  thereof, 
and  delivers  it  to  C  for  $985.00.     The  contract  now  existing  between 

A,  B  and  C,  is  one  of  suretyship,  in  which  A  is  principal,  C  creditor, 
and  B  promisor.  A  promisor  in  suretyship  may  be  either  a  surety, 
a  guarantor,  or  an  indorser.    In  this  particular  case  the  obligation  of 

B,  the  promisor,  is  that  of  an  indorser.  The  principal  obligation  of 
5  to  C  is  that  if  the  note  is  presented  for  payment  to  A  at  maturity, 
and  upon  A^s  failure  to  pay,  due  notice  is  promptl}^  given  to  B,  B  will 
be  responsible  to  C  for  the  amount  due  on  the  note.  An  indorser  is 
also  liable  upon  certain  implied  warranties  in  addition  to  his  primary 
liability  as  above  set  forth.  In  the  language  of  the  courts,  the  tech- 
nical liability  of  an  indorser  is  as  follows: 

'  'I  hereby  agree  by  the  acceptance  by  you  of  title  of  this  paper, 
and  the  value  you  confer  upon  me  in  exchange,  to  pay  j'^ou,  or 
any  of  your  successors  in  title,  the  ariiount  of  this  instrument, 
pro\nding  you  or  any  of  your  successors  in  title  present  this 
note  to  the  maker  on  the  date  of  maturity,  and  notify  me  with- 
out delay  of  his  failure  or  refusal  to  pay.  And  I  warrant  that 
all  the  parties  had  capacity  and  authority  to  sign,  and  that 
the  obligation  is  binding  upon  each  of  them.  And  I  will  respond 
to  the  obligation  created  by  these  warranties  even  though  you 
do  not  demand  payment  of  the  maker  at  maturity,  or  notify 
me  of  default." 


COMMERCIAL  LAW  150 

An  indorser  is  usually  defined  to  be  one  who  writes  his  name  on  a 
negotiable  instrument  for  the  purpose  of  passing  title.  By  so  doing, 
he  agrees  to  answer  for  the  debt  of  another.  That  is,  he  agrees  con- 
ditionally to  pay  the  obligation  of  the  maker  of  the  instrument  if  the 
maker  does  not,  and  if  the  indorser  is  promptly  notified  of  the  failure  of 
the  maker  to  pay. 

Irregular  indorser  is  the  term  applied  to  persons  who  sign  negoti- 
able instruments  outside  the  chain  of  title.  For  example,  if  A  is  the 
maker  of  a  promissory  note  and  B  is  the  payee,  and  C  places  his 
signature  on  the  back  of  the  note,  C  is  an  irregular  indorser.  He 
signs  outside  the  chain  of  title.  B  is  the  one  who  must  first  place  his 
signature  on  the  back  of  the  note  to  transfer  title.  The  courts  of  the 
different  states  have  not  been  in  harmony  in  fixing  the  liability  of  an 
irregular  indorser.  Some  make  his  liability  that  of  a  surety,  some 
that  of  a  guarantor,  and  others  that  of  an  indorser.  Many  of  the 
states  at  the  present  time  have  statutes  regulating  the  making  and 
transfer  of  negotiable  instrument.  The  codes  generally  fix  the 
liability  of  an  irregular  indorser  to  be  that  of  an  indorser. 

187.  Consideration  to  Contracts  of  Suretyship.  An  agreement 
to  answer  for  the  debt,  default,  or  obligation  of  another,  to  be  binding, 
must  constitute  a  contract.  It  must  contain  all  the  elements  of  a 
simple  contract,  including  a  valuable  consideration.  A  valuable 
consideration  may  be  defined  to  be  anything  of  benefit  to  the  one 
making  the  promise,  or  anything  of  detriment  to  the  one  to  w^hom 
the  promise  is  made.  A  promise  made  in  return  for  a  promise,  usually 
termed  "a  promise  for  a  promise,"  is  considered  a  valuable  considera- 
tion as  well  as  something  of  value  actually  given  to  the  one  makin ti- 
the promise.  A  consideration  need  not  be  adequate.  It  need  not  be 
commensurate  with  the  obligation  entered  into.  In  the  absence  of 
fraud,  a  consideration  of  one  dollar  will  support  a  contract  for 
$10,000.00  as  well  as  an  actual  consideration  of  $10,000.00.  In  a 
suretyship  contract,  three  persons  are  concerned;  the  party  owing  the 
original  debt,  the  one  to  whom  the  debt  is  payable,  and  the  one 
promising  to  answer  for  another's  debt.  By  reason  of  the  third  partv 
to  a  suretyship  contract,  the  question  of  consideration  is  sometimes 
confusing.  If  the  obligation  of  the  promisor,  or  the  party  agreeing 
to  answer  for  the  debt  of  another,  is  made  at  the  same  time,  and  is  a 
part  of  the  same  transaction  as  the  contract   between  the  original 


100  COMMERCIAL  LAW 

debtor  and  his  creditor,  the  consideration  supporting  the  contract 
between  the  original  debtor  and  the  creditor  supports  the  contract 
of  the  promisor.  For  example,  if  A  endeavors  to  purchase  SlOO.OO 
worth  of  goods  of  B,  and  B  refuses  to  make  the  sale  unless  C  signs 
a  contract  of  guaranty  for  the  value  of  the  goods,  and  C  signs  such 
a  contract  of  guaranty  which  is  delivered  to  B  before  the  goods  are 
delivered,  the  consideration,  namely  the  receipt  of  $100.00  worth  of 
goods  delivered  to  A  which  supports  A's  promise  to  B,  will  support 
C's  promise  to  B  to  pay  the  $100.00,  if  A  fails  to  pay  it.  If  the 
suretyship  contract  is  entered  into  after  the  original  obligation  is 
incurred,  and  independently  of  it,  there  must  be  a  separate  and 
independent  consideration  to  support  it.  For  example,  if  A  pur- 
chases $100.00  worth  of  goods  from  B,  agreeing  to  pay  for  them 
in  thirty  days,  and  after  fifteen  days  have  elapsed  after  delivery  of 
the  goods,  B,  fearing  A  is  insolvent,  asks  him  to  furnish  a  guaranty 
of  C,  C  must  receive  a  valuable  consideration  to  support  his  contract 
of  guaranty,  separate  and  distinct  from  the  consideration  which  sup- 
ports A's  obligation  to  B. 

188.  Contract  of  Suretyship  Must  be  in  Writing.  About  1676, 
the  English  Parliament  passed  a  statute  known  as  the  Statute  of 
Frauds.  Among  other  things  this  statute  required  contracts  of  surety- 
ship to  be  in  writing  to  be  enforceable.  The  statute  was  in  part  as 
follows,  "No  action  shall  be  brought  whereby  to  charge  the  defendant 
upon  any  special  promise  to  answ^er  for  the  debt,  default  or  miscarriage 
of  another  person  unless  the  agreement  upon  which  action  shall  be 
brought  or  some  memorandum  or  note  thereof  shall  be  in  w'riting, 
signed  by  the  party  to  be  charged  therewith  or  some  person  thereunto 
by  him  lawfully  authorized." 

The  states  of  this  country  generally  have  re-enacted  this  statute. 
An  oral  contract  of  suretyship  is  not  void.  The  parties  may  volun- 
tarily carry  it  out  if  they  choose.  The  law  does  not  make  it  illegal. 
The  law  simply  says  that  it  is  not  enforceable.  If  an  action  is  brought 
by  a  party  on  an  oral  contract  of  suretyship  and  the  other  party  objects 
for  that  reason,  the  court  will  not  enforce  the  contract.  To  satisfy  the 
Statute  of  Frauds  it  is  not  necessary  that  the  entire  contract  be  in 
writing,  but  the  substance  must  be  stated,  and  the  writing  must  be 
signed  by  the  one  promising  to  answer  for  the  other's  obligation. 

A  promise  to  pay  one's  own  debt  is  not  within  the  Statute  of 


COMMERCIAL  LAW  161 

Frauds,  and  need  not  be  in  writing  to  be  enforceable.  If  a  promise 
is  made  for  the  primary  purpose  of  benefiting  the  promisor,  even 
though  it  takes  care  of  the  debt  of  another,  it  is  regarded  as  an  original 
promise  of  the  promisor,  and  need  not  be  in  writing. 

189.  General,  Special,  Limited  and  Continuing  Guaranties.  Guar- 
anties may  be  directed  to  some  particular  person  or  firm,  or  may  be 
addressed  to  anyone  who  desires  to  accept  them.  An  open  guaranty, 
or  one  addressed  to  anyone  is  called  a  general  guaranty.  A  guaranty 
addressed  to  a  particular  person  or  firm  is  called  special  guaranty. 
In  case  of  a  special  guaranty,  only  the  person  to  whom  it  is  addressed 
can  accept  it.  Anyone  can  accept  a  general  guaranty.  A  letter  of 
guaranty  addressed,  "to  whom  it  may  concern,"  is  a  general  guaranty, 
while  one  addressed  to  "The  A.  B.  Co.,"  is  a  special  guaranty. 

A  guaranty  limited  as  to  time,  either  by  specifying  the  date  on 
which  it  is  to  expire,  or  by  specifying  the  number  of  transactions  or 
the  transactions  it  is  to  embrace,  is  a  limited  guaranty.  If  no  limit  of 
time  or  of  number  of  transactions  is  placed  therein,  it  continues  until 
withdrawn  by  the  guarantor.     This  is  called  a  continuing  guaranty. 

190.  Notice  to  Guarantors.  A  guarantor  may  be  entitled  to 
two  kinds  of  notice.  He  may  be  entitled  to  notice  of  acceptance  of 
the  guaranty,  and  he  may  be  entitled  to  notice  of  default  of  his  prin- 
cipal. The  first  is  called  notice  of  acceptance  of  a  guaranty,  the 
second,  notice  of  default  of  a  guaranty.  If  a  person  stipulates  in  his 
letter  of  guaranty  that  he  requires  notice  of  acceptance  of  his  guaranty, 
the  creditor  must  give  him  such  notice  to  hold  him.  Without  such 
stipulation  he  is  not,  in  most  jurisdictions,  entitled  to  notice.  A 
addresses  the  following  letter  of  credit  to  B : 

Cleveland,  O.,  Jan.  4,  1909. 
Mr.  B. 

Give  A  credit  at  your  store  to  the  amount  of  $25.00.     I  will  pay 
you  if  he  does  not. 

Signed— C. 

The  letter  of  guaranty  does  not  require  B  to  notify  C  of  its  ac- 
ceptance. In  the  Federal  Courts,  the  rule  requires  notice  of  acceptance 
of  guaranties.  It  is  sound  business  practice  always  to  notify  a  creditor 
of  acceptance  of  a  guaranty.  If  a  letter  of  guaranty  contains  a  stipu- 
lation that  the  guarantor  is  to  receive  notice  of  default  of  his  principal, 
such  notice  must  be  given,  or  the  guarantor  will  be  discharged  to  the 
amount  of  his  damage  resulting  from  failure  to  receive  this  notice. 


162  COMMERCIAL  LAW 

In  case  of  guaranties  involving  the  payment  of  a  definite  amount  at  a 

definite  time. 

For  example,  in  case  of  guaranty  of  payment  of  a  promissory  note,  no 
notice  is  necessary  on  the  part  of  the  creditor  to  the  guarantor  of  the  failure  of 
the  principal  to  pay.  In  other  cases  it  may  be  stated  as  a  general  rule  that 
notice  should  be  given  the  guarantor  of  default  of  his  principal.  It  is  safe  busi- 
ness policy  for  a  creditor  to  give  notice  to  a  guarantor  of  default  of  payment  on 
the  part  of  his  principal. 

191.  Defense  of  Payment.  Suretyship  obligations  are  obliga- 
tions to  answer  for  the  debts  or  default  of  another.  They  may  be 
in  the  form  of  a  contract  of  a  surety,  of  a  guarantor,  or  of  an 
indorser.  Certain  things  constitute  suretyship  defenses.  They 
apply  equally  to  a  surety,  a  guarantor,  and  an  indorser.  If  a  prin- 
cipal debtor  pays  or  settles  the  debt  which  another  promises  to  pay, 
the  promisor  is  thereby  discharged.  Payment  by  a  principal  is  a 
complete  suretyship  defense. 

For  example,  A  owes  B  $100.00,  C  in  writing  promises  to  pay  A's  debt 
when  it  is  due.   A  pays  B.    C  is  thereby  discharged. 

192.  Suretyship  Defense  of  Alteration  of  Principal  Contract. 

If  the  contract,  payment  of  which  is  secured  by  the  contract  of 
suretyship,  is  changed  in  any  material  way  by  the  creditor  or  by 
anyone,  with  his  consent,  or  by  his  direction,  the  promisor  is  thereby 
discharged.  If  the  change  increases  or  decreases  the  liability  of  the 
principal  to  the  contract  the  alteration  is  material. 

For  example,  A  promises  to  pay  B  $200.00.  C  in  writing  promises  to  pay  B 
this  amount  in  case  A  fails  to  pay.  If  B  changes  the  amount  to  $250.00,  C  is  dis- 
charged; if  B  changes  the  amount  to  $150.00,  C  is  discharged.  If  B  adds  the 
name  of  D  to  the  original  contract,  C  is  discharged;  if  B  changes  the  place  of 
payment,  C  is  thereby  discharged. 

193.  Defense  of  Granting  Extension  of  Time  to  Principal.    If  a 

creditor  enters  into  a  contract  by  which  the  principal  is  given  an 

extension  of  time,  the  promisor  is  released.   This  does  not  mean  mere 

delay  in  enforcing  the  collection  of  the  principal  debt,  nor  does  it 

mean  leniency  of  a  creditor  with  his  debtor.    If,  however,  a  creditor 

makes  a  contract  based  upon  a  valuable  consideration,  by  which  the 

principal  debtor  is  granted  an  extension  of  time  within  which  to  pay 

his  debt,  the  promisor  is  discharged. 

For  example,  if  A  owes  B  $1 ,000.00  on  March  1st,  and  C  in  writing  promises 
B  to  pay  if  A  does  not,  if  B  does  not  collect  from  A  on  March  1st,  but  lets  the 
debt  run  until  March  15th  or  indefinitely,  C  is  not  thereby  discharged.  If, 
however,  B  in  consideration  of  A 's  promise  to  pay  him  interest  at  a  certain  rate 
after  March  1st,  extends  the  time  until  April  1st,  C  is  discharged.    To  discharge 


COMMERCIAL  LAW  163 

the  promisor,  the  agreement  with  the  principal  to  extend  the  time  of  payment 
must  be  based  upon  a  valuable  consideration,  and  must  be  for  a  definite  time. 

194.  Defense  of  Fraud  and  Duress.  Fraud  practiced  by  the 
creditor  upon  the  principal  or  upon  the  promisor  is  a  defense  to  the 
promisor. 

For  example,  if  A  is  indebted  to  B  and  C  guarantees  A's  debt,  and  if  B 
procured  the  contract  with  A  by  fraud,  or  procured  the  guaranty  from  C  by 
fraud,  C  can  avoid  the  contract  of  guaranty  by  reason  of  the  fraud. 

If  the  fraud  is  practiced  by  the  principal  upon  the  promisor, 
it  is  no  defense  to  the  promisor  as  against  the  creditor. 

For  example,  if  C  guarantees  A's  debt  to  B  and  the  guaranty  is  procured 
through  the  fraud  of  A  without  B's  knowledge  or  consent,  the  fraud  will  not 
avail  C  as  a  defense  to  an  action  brought  by  B  upon  the  guaranty. 

The  same  is  true  of  duress.  For  a  fuller  explanation  of  fraud 
and  duress  see  sections  on  Fraud  and  Duress  under  Contracts. 

195.  Surety  Cannot  Compel  Creditor  to  Sue  Principal.  Unless 
so  provided  for  by  statute,  a  promisor  to  a  suretyship  contract  cannot 
compel  a  creditor  to  sue  a  principal  when  the  debt  secured  is  due,  or 
claim  his  discharge  for  failure  on  the  part  of  the  creditor  to  comply 
with  this  request.  A  few  states  provide  by  statute  that  a  promisor 
may  by  notice  compel  a  creditor  to  sue  a  principal  upon  a  suretyship 
obhgation  when  due,  or  be  discharged  for  his  failure  so  to  do. 

196.  Surety  Companies.  At  the  present  time,  corporations  are 
organized  for  the  purpose  of  entering  into  suretyship  obligations  for 
profit.  Bonds  of  public  officials  as  well  as  of  private  individuals, 
judicial  bonds  given  in  appeal  of  cases  at  law  from  one  court  to  a 
higher  court  are  commonly  signed  by  surety  companies.  These 
companies,  for  an  agreed  annual  consideration  called  a  premium, 
sign  as  surety  these  bonds  for  responsible  individuals.  Sureties  were 
once  said  to  be  favorites  of  the  law.  This  was  for  the  reason  that 
individual  sureties  signed  private,  official,  or  judicial  bonds  as  a  favor 
to  the  principal,  ordinarily  without  receiving  any  compensation 
therefor.  When  a  liability  arose  the  surety  escaped  if  possible,  since 
it  was  not  his  obligation,  but  another's  which  he  was  called  upon  to 
pay.  The  courts  favored  him  and  technical  defenses  were  recog- 
nized which  were  not  recognized  as  a  defense  by  persons  primarily 
liable.  In  the  case  of  surety  companies,  however,  there  is  no  reason 
for  this  favoritism,  since  the  surety  engages  in  the  contract  for  a  con- 
sideration, and  not  as  a  favor  to  anyone.  The  tendency  of  the  courts 
is  to  hold  surety  companies  strictly  to  the  terms  of  their  contracts. 


164  COMMERCIAL  LAW 

197.  Subrogation.  By  subrogation  is  meant  the  substitution 
of  the  promisor  for  the  creditor  in  case  the  promisor  to  a  suretyship 
obligation  pays  his  principal's  debt. 

For  example,  if  A  signs  a  guaranty  by  the  terms  of  which  he  agrees  to  pay 
B's  debt  to  C,  when  the  debt  is  due  if  B  fails  to  pay  it,  and  A  pays  it,  A  is  placed 
in  C's  position  and  may  collect  the  debt  from  B.  Any  securities  of  B  that  C 
held  for  the  debt  now  belong  to  A.  If  C  has  a  judgment  against  B  for  the  debt, 
A  is  subrogated  to  the  judgment  and  may  himself  enforce  it. 

198.  Indemnity.  The  law  implies  a  contract  on  the  part  of  the 
principal  to  a  suretyship  contract  to  pay  the  promisor  when  the  latter 
pays  the  suretyship  obligation. 

For  example,  if  A  guarantees  B's  debt  to  C,  as  soon  as  A  is  obliged  to  pay 
C,  and  does  not  pay  C,  A  may  sue  B  on  an  implied  contract  of  indemnity  for 
the  amount  he  has  paid  C. 

199.  Contribution.  Contribution  is  the  term  applied  to  the 
right  of  one  of  two  or  more  co-promisors  to  a  suretyship  obligation 
to  secure  a  pro  rata  share  from  his  co-promisors  of  the  amount  he  is 
obliged  to  pay  the  creditor  on  a  suretyship  contract. 

For  example,  if  A,  B,  and  C  guarantees  D's  debt  of  $150.00  to  E,  and 
when  the  bebt  is  due,  E  sues  A  and  collects  $150.00  from  him,  A  can  sue  B  and 
C  for  $50.00  each.  If  A  pays  E  only  $50.00  he  can  collect  nothing  from  B  and 
C,  since  this  is  only  his  share  of  the  debt.  But  if  A  settles  the  debt  with  E  for 
$50.00,  he  can  recover  one-third  the  amount  from  both  B  and  C.  A  can  pay 
the  debt  when  it  is  due,  without  waiting  for  suit  if  he  so  desires,  and  proceed  to 
collect  one-third  the  amount  from  both  B  and  C. 

PERSONAL  PROPERTY 

200.  Personal  Property  in  General.  Personal  property  is  the 
term  applied  to  property  other  than  real  estate.  It  may  be  either 
tangible  or  intangible.  Personal  property  is  sometimes  divided  into 
chattels  real  and  chattels  personal.  Chattels  real  are  interests  in  real 
estate  not  amounting  to  owTiership.  Real  estate  mortgages  and 
leases  are  common  examples  of  chattels  real.  Chattels  personal 
embrace  all  personal  property  other  than  chattels  real.  Every  thing 
subject  to  ownership  not  connected  with  the  land  is  included  in  the 
classification  of  chattels  personal.  Promisory  notes,  personal  apparel, 
furniture,  tools,  and  animals  are  common  examples.  Chattels  per- 
sonal are  of  a  tangible,  or  of  an  intangible  nature.  They  are  mere 
rights,  or  they  are  things  which  may  be  handled  and  used.  A  promis- 
sory note,  a  contract,  or  a  mortgage  is  a  right  as  distinguished  from  a 
thing  in  possession.  These  rights  are  sometimes  called  chosen  in 
action,  while  tangible  articles  of  personal  property,  such  as  watches, 
chairs,  and  horses  are  called  choses  in  possession.    The  law  relating 


COMMERCIAL  LAW  165 

to  personal  property  is  discussed  at  length  under  the  sections  on  Sales 
of  Personal  Property,  Pledges,  Chattel  Mortgages,  Carriers  and  Wills. 

201.  Acquisition  of  Title  and  Transfer  of  Personal  Property. 
Title  to  personal  property  may  be  acquired  in  several  ways,  chief 
among  them  being  by  contract,  by  possession,  by  gift,  and  by  opera- 
tion of  law.  If  A  purchases  a  carriage  from  B,  the  transaction  is  a 
sale  of  personal  property  and  A  is  entitled  to  possession  of  the  carriage 
by  reason  of  the  contract.  Title  to  the  carriage  is  given  to  A  by  con- 
tract. Title  to  some  kinds  of  property  is  acquired  by  possession. 
Title  to  wild  animals  is  acquired  by  possession.  The  same  is  true  of 
fish.  Title  to  lost  property,  except  as  against  the  owner,  is  acquired 
by  possession.  Title  to  property  is  also  acquired  by  voluntary  gift  on 
the  part  of  the  owner. 

If  A  dies  possessed  of  articles  of  personal  property,  the  property 
passes  to  his  personal  representative  to  be  turned  into  money  to 
pay  A's  debt,  or  to  be  distributed  in  the  forni  of  money,  or  without 
being  sold,  to  A's  descendant  designated  by  law.  This  is  known  as 
acquiring  personal  property  by  succession,  or  by  operation  of  law. 
Personal  property  may  also  be  transferred  in  specie  by  will. 

SALES 

202.  Sale  Defined.  A  transfer  of  title  of  personal  property 
is  termed  a  sale.  By  title  is  meant  ownership.  Mere  possession 
of  personal  property  does  not  constitute  ownership,  neither  does 
right  to  possession  constitute  ownership.  One  may  lease  personal 
property,  and  by  means  of  the  lease  have  the  right  to  possession, 
while  the  title  or  ownership  is  in  another.  One  may  find  or  borrow 
personal  property,  obtaining  possession  while  the  title  or  ownership 
remains  in  another.  The  transfer  of  the  title  or  ownership  of  per- 
sonal property  as  distinguished  from  the  transfer  of  mere  possession 
or  the  right  of  possession,  constitutes  the  subject  of  Sales.  A  sale 
may  be  defined  to  be  a  contract  by  which  the  title  to  personal  prop- 
erty is  transferred  for  a  consideration  in  money,  or  money's  worth. 
This  transfer  of  tide  to  personal  property  may  be  entirely  independent 
of  the  transfer  of  possession.  One  may  make  a  sale  of  personal 
property  by  which  the  purchaser  takes  the  title  while  the  possession 
remains  in  the  seller,  or  in  some  third  person. 

When,  and  under  what  circumstances  the  title  passes  is  an  iin- 


166  COMMERCIAL  LAW 

portant  question.  A  sale  of  personal  property  ordinarily  gives  the 
purchaser  the  right  to  immediate  possession  of  the  property.  The 
time  the  title  actually  passes  to  the  purchaser  does  not  depend  upon 
the  time  the  property  is  delivered  to  the  purchaser,  but  upon  the  in- 
tention of  the  parties  to  the  contract  of  sale.  A  sale  is  a  contract 
requiring  all  the  elements  of  a  simple  contract.  There  must  be  a 
meeting  of  the  minds  of  the  contracting  parties,  a  valuable  considera- 
tion, competency  of  parties,  etc.  (See  Elements  oj  a  Contract,  chapter 
on  Contracts.) 

203.  Sale  Distinguished  from  a  Contract  to  Sell.  A  sale  is  a 
contract  by  which  the  title  passes  to  the  purchaser  at  the  time  the 
sale  is  made.  A  contract  to  sell  is  a  contract  by  which  the  title  passes 
to  the  purchaser  at  a  future  time.  A  sale  is  a  present  transfer  of 
title  or  ownership  to  personal  property.  A  contract  to  sell  is  an  agree- 
ment to  pass  the  title  or  ownership  to  personal  property  to  another  at 
a  future  time.  The  practical  distinction  is  in  determining  upon 
whom  the  loss  falls  in  case  the  goods  are  destroyed  or  injured  by  fire, 
or  other  accident.  In  case  of  a  sale,  title  or  ownership  passes  to  the 
purchaser,  even  though  possession  remains  in  the  seller.  If  the  goods 
are  lost  by  fire,  without  fault  of  the  seller,  the  purchaser  bears  the  loss. 
In  case  of  a  contract  to  sell,  the  title  or  ownership  does  not  pass  to  the 
purchaser  until  the  time  for  fulfilling  the  contract  has  arrived,  and 
until  the  conditions  of  the  contract  are  fulfilled.  If  the  goods  are 
lost  before  the  contract  is  carried  out,  the  loss  falls  on  the  seller.  For 
example.  A,  a  farmer,  sells  ten  barrels  of  apples  to  B.  B  examines 
the  apples,  selects  the  ten  barrels,  pays  A  the  stipulated  price,  and 
says  he  will  call  for  them  the  following  day.  Before  B  calls,  the  apples 
are  destroyed  by  fire,  without  fault  of  yl.  B  must  stand  the  loss. 
The  title  or  ownership  passed  to  him  when  the  sale  was  made.  If  B 
calls  on  A  and  enters  into  a  contract  by  the  terms  of  which  A  agrees 
to  deliver  at  B's  residence  ten  barrels  of  apples  the  following  day,  at 
an  agreed  price,  and  the  apples  are  destroyed  by  fire  before  A  de- 
livers them,  the  loss  falls  on  A.  This  is  a  contract  to  make  a  sale, 
not  a  sale.  Title  to  the  apples  does  not  pass  to  B  until  they  are  de- 
livered by  A,  according  to  the  terms  of  the  agreement. 

Parties  may  agree  that  title  may  pass  at  a  certain  time,  or  upon 
the  performance  of  a  certain  condition.  In  this  event,  title  does  not 
pass  until  the  time  mentioned  arrives,  or  the  condition  is  fulfilled. 


COMMERCIAL  LAW  167 

In  the  majority  of  sales  of  personal  property,  the  parties  do  not  set 
forth  the  terms  and  conditions  fully.  In  the  absence  of  an  express 
agreement  or  custom  to  the  contrary,  parties  are  presumed  to  intend 
the  title  or  ownership  to  pass  to  the  purchaser  at  the  time  the  sale  is 
made. 

204.  Sale  Distinguished  from  Barter.  A  sale  is  an  agreement 
to  transfer  the  title  of  personal  property  for  a  consideration  in  money, 
or  for  something  measured  by  a  money  standard.  An  agreement  to 
exchange  goods,  or  an  exchange  of  goods,  is  a  barter,  and  not  a  sale. 
The  distinction  is  technical,  but  serves  some  useful  purposes.  If  A, 
for  a  consideration  of  $200.00,  purchases  a  car  of  cabbage  from  B  in 
Nashville,  to  be  delivered  in  Cleveland,  June  20th,  and  the  car  does 
not  arrive,  A  may  go  into  the  nearest  market,  and  purchase  a  car  of 
cabbage  of  the  same  quality,  and  collect  the  difference  between  the 
market  price  and  contract  price  from  B.  If  A  is  obliged  to  pay  §250.00 
for  the  cabbages,  he  can  collect  $50.00  from  B.  If,  on  the  other 
hand,  A  agrees  to  give  B  a  horse  for  a  car  of  cabbages,  no  price  hav- 
ing been  fixed  on  the  horse  or  on  the  cabbages,  and  B  fails,  and  re- 
fuses to  carry  out  the  contract,  A  must  sue  B  on  the  contract,  and 
collect  as  damages  such  amounts  as  he  is  able  to  show  he  lost  by 
reason  of  B's  failure  to  carry  out  the  contract. 

Salesmen  are  commonly  employed  to  sell  goods.  This  means 
to  sell  for  money,  and  unless  they  are  expressly  authorized  to  barter 
or  exchange  goods,  attempted  exchanges  are  without  authority,  and 
do  not  bind  their  principal. 

205.  Conditional  Sales.  The  term,  conditional  sale,  has  come 
to  have  a  technical  meaning.  Articles  of  merchandise,  such  as  sew- 
ing machines,  cream  separators  and  cash  registers  arc  commonly 
sold  under  a  special  contract,  by  which  possession  is  given  the  pur- 
chaser, and  the  title  by  express  agreement  remains  in  the  seller  until 
the  entire  purchase  price  is  paid.  The  purpose  of  this  form  of  con- 
tract is  to  obtain  security  for  the  purchase  price  of  the  article  sold. 
In  the  absence  of  statutory  regulations,  if  the  purchaser  does  not  pay 
the  purchase  price  at  the  agreed  time,  the  seller  may  take  possession 
of  the  property.  It  is  the  custom  of  sellers  using  this  form  of  con- 
tract to  require  the  purchaser  to  sign  a  contract  stipulating  that  the 
purchase  price  be  represented  by  promissory  notes  of  the  purchaser, 
payable  in  installments,  and  that  the  title  is  to  remain  in  the  seller 


IGS  COMMERCIAL  LAW 

until  the  entire  purchase  price  is  paid.  If  the  purchaser  defaults  in 
any  one  of  his  installments,  by  the  terras  of  the  contract  all  the  re- 
maining installments  at  once  become  due.  This  form  of  contract 
worked  many  hardships.  Purchasers  were  required  to  make  a  sub- 
stantial payment  in  advance.  If  they  succeeded  in  paying  practically 
all  the  installments,  but  defaulted  in  one,  the  seller  could  take  pos- 
session of  the  property,  causing  the  purchaser  to  lose  all  he  had  paid. 
This  form  of  contract  proved  so  unconscionable  in  some  of  its  workings 
that  the  legislatures  of  most  states  have  passed  statutes  requiring 
conditional  sale  contracts  to  be  filed  with  a  public  official  to  be  en- 
forceable, and  do  not  permit  the  seller  to  take  possession  of  property 
without  repaying  the  purchaser  the  amount  already  paid  less  the 
actual  damage  the  property  has  sustained.  This  damage  usually 
cannot  exceed  50%  of  the  original  selling  price  of  the  property. 

206.  Sale  Distinguished  from  a  Bailment.  Possession  of  per- 
sonal property  is  frequently  given  another,  for  the  purpose  of  having 
work  performed  on  it,  to  be  used  by  another,  to  secure  a  debt,  or  to 
be  protected  or  preserved  without  transfer  of  title.  Such  a  trans- 
action is  called  a  hailment.  It  is  discussed  more  at  length  under  a 
separate  chapter.  A  bailment  does  not  constitute  a  sale,  in  that 
there  is  no  transfer  of  title,  or  ownership  of  the  personal  property, 
possession  of  which  is  given  to  another.  For  example,  A  hires  the 
use  of  a  horse  and  carriage  from  B,  a  liveryman,  for  two  days.  A 
secures  possession  of  the  horse  and  carriage.  He  has  the  right  to 
retain  possession  of  them  for  two  days,  and  has  the  right  to  use  them 
for  the  purpose  hired.  He  cannot  sell  them,  however,  nor  can  he 
do  anything  inconsistent  with  B's  ownership.  This  transaction  is  a 
bailment. 

207.  What  May  Be  the  Subject  of  a  Sale.  Any  article  of  per- 
sonal property  having  a  present  existence  may  be  sold.  It  matters 
not,  whether  it  is  a  chose  in  possession,  or  chose  in  action.  By  chose 
in  possession  is  meant  a  tangible  piece  of  personal  property  as  dis- 
tinguished from  a  mere  right.  A  horse,  plow,  chair  or  desk  is  an 
example  of  a  chose  in  possession.  A  promissory  note,  a  contract  or 
mortgage  is  an  example  of  chose  in  action.  Either  may  be  the  sub- 
ject of  a  sale.  The  distinction  between  a  sale  or  present  transfer  of 
title  to  personal  property,  and  a  contract  to  make  a  sale,  must  be  borne 
in  mind.     If  A  sells  his  horse  to  B  for  $100.00,  in  the  absence  of  any 


COMMERCIAL  LAW  Hi!) 

agreement  as  to  delivery  the  title  to  the  horse  passes  to  5  as  soon  as 
the  contract  is  made.  This  transaction  is  a  sale.  If  A  promises  to 
sell  his  horse  to  B  the  second  of  next  month,  if  B  will  agree  to  pay  him 
S  100.00  when  the  horse  is  delivered  the  second  of  next  month,  and 
B  so  agrees,  the  contract  is  not  a  sale,  but  a  contract  to  make  a  sale. 
Articles  of  personal  property,  to  be  made  or  manufactured,  are  not 
the  subject  of  a  sale. 

Business  men  commonly  make  contracts  to  sell  goods  in  the 
future  which  they  do  not  have  in  stock,  but  expect  to  manufacture, 
or  purchase  elsewhere.  Such  contracts  are  not  sales.  The  title  to 
the  goods  does  not,  and  cannot  pass  to  the  purchaser  when  the  con- 
tract is  made.  They  are  mere  agreements  to  make  sales  in  the  future. 
They  are  treated  the  same  as  ordinary  contracts,  not  as  present  sales. 
If  the  goods  are  destroyed  before  they  are  completely  manufactured, 
the  seller  stands  the  loss,  since  the  title  has  not  passed  from  him. 
If  a  person  agrees  to  sell  in  the  future  goods  to  be  manufactured, 
and  fails  to  deliver  the  goods  specified  in  the  contract,  the  buyer  has 
the  usual  remedy.  He  may  purchase  the  goods  in  the  market  nearest 
the  place  of  delivery  at  the  time  of  delivery,  and  sue  the  seller  for  the 
difference  between  the  contract  price  and  the  market  price.  The 
buyer  is  not  obliged  actually  to  purchase  the  goods  to  enable  him  to 
bring  suit  against  the  seller.  He  may  bring  a  suit  against  the  seller 
for  the  difference  between  the  price  he  contracted  to  pay  for  the  goods 
and  the  market  price  at  the  time  and  place  of  delivery.  Crops  to  be 
grown  are  not  the  subject  of  present  sale.  Crops  planted,  but  not 
matured,  may  be  sold.  Title  to  the  crops  at  the  present  stage  of  their 
existence  passes  to  the  buyer. 

208.  Statute  of  Frauds,  or  Contracts  of  Sale  Which  Must  Be  in 
Writing.  One  section  of  the  English  Statute  of  Frauds  applied 
to  sales.  This  statute  was  passed  in  England  about  167G.  The 
seventeenth  section,  which  applies  to  sales  of  personal  property,  is 
as  follows: 

And  be  it  further  enacted  by  aforesaid  authority,  that  from  and  after 
the  four  and  twentieth  day  of  June,  no  contract  for  the  sale  of  any  goods, 
wares  or  merchandise  for  the  price  of  ten  pounds  sterUng,  or  upwards,  shall  be 
allowed  to  be  good  except  the  buyer  shall  accept  part  of  the  goods  so  sold, 
and  actually  receive  the  same,  or  give  something  in  earnest  to  bind  the  bar- 
gain, or  in  part  payment,  or  that  some  note  or  memorandum  in  writing  of 
said  bargain  be  made,  and  signed  by  the  parties  to  be  charged  by  such  contract, 
or  their  agent  thereunto  lawfully  authorized. 


170  COMMERCIAL  LAW 

The  states,  generally,  have  a  statute  modelled  after  this  section 
of  the  English  statute,  and  providing  that  contracts  for  the  sale  of 
personal  property,  the  price  of  which  exceeds  fifty  dollars,  shall  not 
be  enforceable  unless  a  memorandum  of  the  contract  be  made  and 
signed,  except  there  be  a  delivery  of  at  least  a  part  of  the  property, 
or  except  something  be  paid  by  the  purchaser  to  bind  the  bargain. 
Some  of  the  states  have  no  statute  of  frauds  containing  a  provision 
relating  to  the  price  of  the  goods.  In  many  of  the  states,  the  valua- 
tion fixed  by  statute  exceeds  fifty  dollars.  Where  the  statute  exists, 
contracts  which  are  not  in  writing  are  not  void.  They  are  merely 
voidable.  The  parties  may  voluntarily  carry  them  out  if  they  so 
choose.  The  law  does  not  prohibit  them,  but  if  one  party  refuses  to 
recognize  the  contract,  the  other  party  cannot  enforce  it  by  an  action 
at  law.  A  portion  of  the  fourth  section  of  the  English  Statute  of 
Frauds  provides  that  contracts,  by  their  terms  not  to  be  performed 
within  one  year  from  the  time  of  the  making  thereof,  must  be  in 
writing  to  be  enforceable.  The  states,  generally,  have  a  similar 
statutory  provision.  This  statute  applies  to  sale  of  personalty  as  well 
as  to  real  estate.  If  the  contract  can  be  performed  within  one  year, 
it  is  not  within  the  provisions  of  the  statute. 

209.  Delivery  of  Personal  Property  Sold.  In  the  absence  of 
any  express  agreement  to  the  contrary,  there  is  an  implied  agreement, 
on  the  part  of  the  seller,  to  deliver  personal  property  sold,  when  the 
purchaser  pays  the  price.  By  delivery  is  meant  placing  the  personal 
property  at  the  disposal  of  the  purchaser.  It  must  be  borne  in  mind 
that  in  a  contract  of  sale  of  personal  property,  title  or  ownership 
passes  to  the  purchaser  at  the  time  the  sale  is  made,  even  though 
possession  remains  in  the  seller.  This  gives  the  buyer  the  right  to 
obtain  possession  of  the  goods  upon  paying  the  price.  If  the  goods 
are  destroyed  without  fault  of  the  seller  after  the  sale,  and  before  de- 
livery, the  loss  falls  on  the  buyer.  If  A  offers  to  sell  B  his  wagon  for 
$100.00,  and  B  accepts,  nothing  being  said  about  delivery,  the  title 
to  the  wagon  passes  at  once  to  B.  If  it  is  destroyed  without  fault  of  A, 
the  loss  falls  on  B,  even  though  B  has  not  paid  the  price  or  received 
possession  of  the  wagon.  B  is  entitled  to  possession  of  the  wagon 
when  he  pays  A  $100.00.  A  is  not  obliged  to  give  B  possession  of  the 
wagon,  even  though  B  is  the  owner  of  it,  until  he  receives  the  price. 
$100.00. 


COMMERCIAL  LAW  171 

In  the  above  example  there  is  no  stipulation  about  delivery. 
The  parties  make  a  sale,  agreeing  upon  the  price  and  thing  to  be 
sold,  nothing  being  said  about  the  delivery.  The  law  in  such  cases 
impliedly  requires  the  seller  to  deliver  when  the  price  is  paid,  and 
not  until  then.  In  many  contracts,  however,  the  time,  place,  and 
manner  of  delivery  are  stipulated  in  the  contract.  Sometimes  usage 
and  custom  supply  these  things  when  the  parties  do  not  expressly 
so  stipulate.  When  a  time,  place,  or  manner  of  delivery  by  the  seller 
is  stipulated  in  a  contract,  either  by  express  agreement,  or  by  usage 
and  custom,  title  to  the  property  usually  does  not  pass  to  the  buyer 
until  the  time  has  elapsed,  and  until  the  seller  has  delivered  according 
to  the  manner  stipulated,  or  has  tendered  delivery. 

A  stipulation  in  a  contract  of  sale  that  the  seller  shall  deliver 
at  a  particular  time  or  place,  or  in  a  particular  manner  is  deemed  to 
show  an  intention  on  the  part  of  the  parties  that  title  shall  not  pass 
until  the  seller  has  so  delivered.  If  the  buyer  refuses  to  accept  the 
goods  or  pay  the  price,  an  offer  to  deliver  by  the  seller  is  equivalent 
to  a  delivery.  The  seller,  on  the  other  hand,  is  not  obliged  to  give  up 
possession  of  the  goods  until  he  receives  the  agreed  price.  If  the 
seller  agrees  to  give  the  buyer  credit,  this  rule  is  not  applicable.  If 
no  time  of  delivery  is  mentioned,  delivery  must  be  made  within  a 
reasonable  time,  depending  upon  the  circumstances  connected  with 
the  particular  contract.  \Mien  delivery  is  to  be  made  in  install- 
ments, failure  to  pay  for  one  installment  ordinarily  entitles  the  seller 
to  refuse  to  deliver  the  balance,  or  if  the  seller  refuses,  or  fails  to  de- 
liver the  first  installment,  the  buyer  may  refuse  to  accept  subsequent 
installments.  The  buyer  is  not  obliged  to  accept  anything  except 
the  article  ordered.  If  more  or  less  is  tendered  him,  he  is  not  bound 
to  accept.  If  he  accepts  more  or  less,  he  is  bound  to  pay  the  reason- 
able value  of  the  same.  If  no  place  of  delivery  is  mentioned,  the 
presumption  is  that  delivery  is  to  be  made  at  the  place  where  the 
property  is  located  at  the  time  the  sale  is  made. 

The  mere  fact  that  delivery  is  to  be  made  in  the  future  does  not 
prevent  title  from  passing  at  the  time  the  sale  is  made.  There  must 
be  something  in  addition  to  the  fact  of  future  delivery  to  delay  the 
passing  of  the  title  until  the  time  of  delivery.  If  A  purchases  an 
automobile  from  B,  making  the  selection,  delivery  to  be  made  the 
following  Thursday,  title  passes  at  once  to  A.     If  the  automobile 


172  COMMERCIAL  LAW 

is  destroyed  by  fire,  or  injured  without  B's  fault,  the  loss  falls  on  A. 
If,  however,  B  is  to  do  anything  with  the  property,  or  is  himself  to 
make  delivery,  this  shows  an  intention  on  the  part  of  the  parties  that 
title  is  not  to  pass  until  delivery  is  made. 

210.  When  Title  Passes.  The  question  of  when  title  to  per- 
sonal property,  the  subject  of  a  sale,  passes  to  the  purchaser  is  impor- 
tant in  determining  upon  whom  the  loss  falls,  if  the  property  is  de- 
stroyed, stolen,  lost  or  levied  upon  by  judgment  of  attaching  creditors. 
Title  or  ownership  to  property  sold  does  not  depend  upon  possession. 
Personal  property  may  be  sold,  and  title  or  ownership  may  pass  to 
the  purchaser,  while  the  seller  still  has  possession,  as  well  as  the  right 
to  possession.  The  general  rule  is  that  title  or  ownership  of  personal 
property  sold  passes  to  the  purchaser  at  the  time  the  parties  to  the 
sale  intend  it  to  pass.  If  their  intention  is  expressed,  it  governs, 
and  the  question  is  settled.  In  the  great  majority  of  sales,  however, 
the  parties  do  not  expressly  determine  when  title  shall  pass  and  this 
must  be  presumed  from  the  circumstances. 

For  example,  if  A  offers  B  $20.00  for  a  certain  harness  which 
is  selected,  and  A  accepts  the  offer,  nothing  being  said  about  the  de- 
livery or  payment,  or  when  title  or  ownership  shall  pass  to  A,  the  law 
presumes  it  to  be  the  intention  of  the  parties  that  title  shall  pass  when 
B  accepts  A's  offer — and  from  that  time,  the  harness  belongs  to  A. 
By  however,  has  the  right  to  retain  possession  of  the  harness  until 
A  pays  him  the  purchase  price  of  $20.00.  When  A  offers  B  the  $20.00 
at  the  place  where  the  harness  was  located  when  the  sale  was  made, 
B  must  give  A  possession.  B  is  not  obliged  to  deliver  at  any  other 
place.  If,  however,  A  offers  B  $20.00  for  B's  harness,  which  is  de- 
termined upon  and  selected,  B  to  deliver  same  at  A's  place  of  business 
the  following  evening,  this  shows  an  intention  on  the  part  of  the  parties 
that  the  title  is  not  to  pass  to  A  until  B  delivers  the  property  to  A  the 
following  evening.  A  tender  or  offer  by  B  to  deliver  the  property 
to  A  the  following  evening,  passes  title  and  places  the  property  at 
A's  risk.  If,  however,  delivery  is  to  be  made  merely  in  the  future, 
not  requiring  the  seller  to  take  the  property  to  any  particular  place, 
the  fact  that  delivery  is  to  be  made  in  the  future  does  not  prevent 
title  passing  to  the  purchaser  at  once. 

If  A  purchases  B's  harness  for  $20.00,  the  harness  having  been 
selected,  delivery  to  be  made  in  five  days,  title  passes  at  once  to  A. 


COMMERCIAL  LAW  173 

A  is  obliged  to  offer  B  $20.00  at  the  expiration  of  five  days,  and  B 
must  give  possession  to  A.  If  the  article  sold  is  to  be  prepared  for 
delivery,  or  any  work  is  to  be  performed  on  it  by  the  seller  before 
delivery,  title  does  not  pass  until  this  work  has  been  completed.  If 
the  goods  are  to  be  weighed  or  measured  to  determine  the  quantity 
or  price,  title  does  not  pass  to  the  purchaser  until  this  has  been 
done.  Probably,  if  the  goods  are  determined  upon,  and  the  en- 
tire mass  is  sold  and  delivered  to  the  buyer  who  is  to  weigh  or 
measure  it  to  determine  the  quantity  only,  the  title  passes  upon  de- 
livery. 

If  the  contract,  sale  provides  that  goods  are  to  be  delivered  to  a 
carrier,  delivery  to  the  carrier  passes  title  to  the  purchaser.  Delivery 
to  the  carrier  must  be  made  so  as  to  protect  the  interests  and  rights 
of  the  purchaser.  The  goods  must  be  properly  packed,  and  the 
proper  kind  of  a  bill  of  lading  taken. 

If  goods  are  sold  upon  approval,  or  upon  trial,  they  must  be 
approved  or  tried  before  title  passes. 

If  a  portion  of  goods  in  mass  or  bulk  is  sold  and  the  mass  or  bulk 
contains  different  qualities,  the  portion  purchased  must  be  separated 
and  selected  before  the  title  passes.  If  a  portion  of  goods  in  bulk  is 
purchased,  the  bulk  being  of  the  same  quality,  separation  of  the 
portion  sold  is  sufficient  to  pass  title.  Some  courts  even  hold  that 
separation  is  not  necessary  to  pass  title,  if  the  bulk  is  of  the  same 
quality.  Title  to  goods  to  be  manufactured  does  not  pass  until  the 
goods  are  manufactured  and  tendered. 

211.  When  Payment  of  Price  Must  Be  Made.  Parties  to  a 
contract  of  sale  may  expressly  agree  upon  a  time  of  payment  of  the 
article  sold.  In  this  event,  the  time  agreed  upon  prevails.  In  the 
absence  of  an  agreed  time  of  payment,  the  law  presumes  that  pay- 
ment is  to  be  made  at  the  time  and  place  of  delivery.  The  seller 
may  retain  possession  of  goods  sold,  until  he  receives  payment  of  the 
agreed  price,  even  though  title  has  passed  to  the  purchaser.  If  the 
sale  is  made  on  credit,  the  purchaser  cannot  be  required  to  pay  until 
the  time  for  which  he  was  to  be  given  credit  has  expired.  In  the 
absence  of  an  agreed  time  for  payment,  payment  must  be  made  at 
the  time  of  delivery  of  the  goods. 

If  the  seller  reserves  any  control  over  the  goods,  title  remains 
in  him.     For  example,  if  he  is  to  ship  the  goods  to  another,  and  if  he 


174  COMMERCIAL  LAW 

takes  the  bill  of  lading  in  his  own  name  instead  of  the  name  of  the 
purchaser,  title  remains  in  the  seller. 

212.  Effect  of  Fraud  Upon  a  Contract  of  Sale.  Fraud  has  been 
defined  by  a  prominent  author  to  be  "A  false  representation  of  facts, 
made  with  a  knowledge  of  its  falsehood,  or  recklessly,  without  belief 
in  its  truth,  with  the  intention  that  it  should  be  acted  upon  by  the 
complaining  party,  and  actually  inducing  him  to  act  upon  it."  If  a 
party  innocently  makes  a  representation,  even  though  it  proves  to  be 
false,  the  representation  is  not  fraudulent  unless  the  party  making 
the  representation  should  have  known,  or  could  easily  have  discovered, 
its  falsity. 

If  A  endeavors  to  buy  goods  from  B,  and  tells  B  that  he  is  worth 
$5,000.00,  when  in  fact  he  is  worth  nothing,  and  B  relying  upon  A's 
statement,  sells  the  goods  to  A,  B  is  entitled  to  rescind  the  contract 
by  reason  of  the  fraud.  He  may  sue  and  recover  the  price  of  the 
goods,  or  he  may  retake  the  goods  from  the  buyer.  (See  Rescission 
under  chapter  on  Contracts.)  If  the  goods  have  been  sold  to  a  third 
party  who  purchases  for  value  and  without  notice  of  the  fraud,  the 
original  seller  cannot  take  the  goods  from  him.  A  sale  procured 
through  fraud  is  voidable,  and  not  void.  The  seller  may  avoid  the 
sale  if  he  chooses.  That  is,  title  vests  in  the  purchaser  subject  to 
being  retaken  by  the  seller,  if  he  chooses,  when  he  discovers  the  fraud. 
If  a  third  person  innocently  purchases  the  goods  before  the  original 
seller  rescinds  the  contract,  the  last  purchaser's  title  cannot  be  dis- 
turbed. The  seller  may  permit  the  purchaser  to  keep  the  goods, 
and  bring  an  action  for  damages  based  upon  deceit. 

One  kind  of  a  sale  frequently  induced  by  fraud  is  void,  absolutely, 
and  not  voidable.  If  a  person  fraudulently  induces  another  to  be- 
lieve that  the  purchaser  is  someone  else,  and  purchases  goods  under 
this  representation,  no  title  passes  from  the  seller,  and  he  may  recover 
the  goods  from  an  innocent  purchaser. 

213.  Rule  of  Caveat  Emptor,  or  Let  the  Purchaser  Beware. 
One  who  purchases  chattel  property  from  anyone  except  the  grower 
or  manufacturer  of  the  article  in  question,  which  is  inspected  by  the 
purchaser,  or  may  be  inspected  by  the  purchaser,  purchases  at  his 
own  risk.  If  the  article  turns  out  to  be  of  poor  quality  or  worthless, 
in  the  absence  of  fraud  or  warranty,  the  purchaser  has  no  redress. 
This  rule  is  called  the  rule  of  Caveat  Emptor,  (let  the  purchaser 


COMMERCIAL  LAW  175 

beware).  Its  purpose  is  to  decrease  litigation,  and  make  men  rely 
upon  their  own  judgment.  If  a  purchaser  is  unwilHng  to  rely  upon 
his  own  judgment,  he  must  exact  a  warranty  from  the  seller.  In  the 
absence  of  warranty  or  fraud,  the  purchaser  must  abide  by  the  result 
of  his  purchase.  If  the  article  purchased  has  defects  apparent  to 
anyone  upon  inspection,  the  purchaser  cannot  complain.  He  should 
have  seen  the  defects.  If  the  defects  are  not  apparent  upon  inspec- 
tion, he  must  bear  the  loss.  He  should  have  required  the  seller  to 
warrant  the  goods  against  latent  defects,  if  he  was  unwilling  to  pur- 
chase on  his  own  judgment.  In  all  sales  by  an  owner,  however, 
title  to  the  goods  is  impliedly  warranted,  and  in  case  of  sale  of  goods 
grown  or  manufactured  by  the  seller,  there  is  an  implied  warranty 
against  latent  defects.  In  all  other  sales,  the  purchaser  buys  at  his 
own  risk,  and  has  no  redress  against  the  seller  unless  the  latter  war- 
rants the  goods.     Warranties  are  discussed  in  the  following  section. 

214.  Express  Warranty.  Contracts  of  sale  often  contain 
collateral  agreements  called  warranties.  Warranties  are  either 
express  or  implied.  An  express  warranty  is  an  agreement  in  addition 
to  the  ordinary  agreement  to  transfer  a  certain  chattel  for  a  con- 
sideration in  money  or  money's  worth,  by  which  the  seller  agrees 
that  the  thing  sold  is  of  a  certain  quality,  or  is  in  a  certain  condition. 
An  express  warranty  is  not  an  essential  part  of  a  contract  of  sale. 
That  is,  a  sale  containing  no  collateral  promise  to  the  effect  that  cer- 
tain conditions  or  terms  of  the  contract  are  warranted,  may  be  made. 
If  the  contract  of  sale  does  not  expressly  state  that  the  seller  warrants 
certain  terms  or  conditions,  or  does  not  contain  words  of  similar 
meaning,  the  contract  of  sale  is  without  express  warranty.  An 
express  warranty,  by  express  agreement,  adds  something  to  the  con- 
tract of  sale.  This  additional  agreement,  called  an  express  warranty, 
enables  the  purchaser  to  recover  damages  from  the  seller  for  failure 
of  the  warranty,  when  he  might  not  be  able  to  have  any  redress  if 
the  sale  were  made  without  warranty.  Express  warranties  may  be 
made  orally,  or  in  writing. 

If  the  seller,  in  making  the  sale  expressly  states  that  he  war- 
rants certain  terms  of  the  contract,  or  uses  language  which  means 
that  he  intends  to  warrant  certain  terms  of  the  contract,  there  is  an 
express  warranty.  A  sells  a  wagon  to  B  and  warrants  that  it  will 
carry  6,000  lbs,  of  stone.     If  it  fails  to  carry  this  amount,  B  can 


176  COMMERCIAL  LAW 

recover  from  A  on  this  warranty.  If  A  had  sold  the  wagon  to  B 
without  this  stipulation,  and  it  had  failed  to  carry  6,000  lbs.  of  stone, 
B  would  have  no  redress. 

A  seller  is  permitted  to  express  his  opinion  relative  to  the  quality 
of  the  article  which  is  the  subject  of  the  sale  without  making  a  war- 
ranty. This  is  called  "trade  talk,"  or  "puffing."  A  seller  is  permitted 
to  express  his  own  opinion  relative  to  the  quality  of  goods  he  is  en- 
deavoring to  sell,  without  having  his  words  amount  to  a  warranty, 
but  if  he  makes  positive  assertions,  his  words  will  be  construed  as  a 
warranty.  Such  expressions  as,  This  is  first  class,  and  This  is 
equal  to  any  on  the  market,  are  usually  regarded  as  "trade  talk" 
and  not  as  warranties. 

215.  Implied  Warranties.  Some  contracts  of  sale  carry  with 
them  implied  warranties.  These  warranties  are  common  to  all  sales 
of  the  particular  class  in  question.  Implied  warranties  cannot  be 
said  to  be  in  addition  to  the  contract  of  sale,  but  are  impliedly  a  part 
of  the  contract.  The  most  common  implied  warranties  are  warranties 
of  title,  warranties  of  wholesomeness  in  sale  of  food,  warranties  in 
sales  by  sample,  warranties  of  merchantability,  and  warranties  of 
fitness  of  goods  to  be  used  for  a  particular  purpose. 

216.  Implied  Warranty  of  Title.  In  every  sale,  in  the  absence 
of  an  express  stipulation  to  the  contrary,  there  is  an  implied  war- 
ranty of  title.  This  means  that  the  ownership  is  in  the  seller,  and 
that  he  has  the  right  to  sell  the  property,  and  that  it  is  free  from  incum- 
brances. This,  of  course,  does  not  prevent  the  seller  from  disposing 
of  just  what  interest  he  has  in  the  property  if  he  expressly  so  contracts. 
For  example,  if  A  negotiates  the  sale  of  a  horse  to  B,  and  tells  B  that 
he  has  purchased  the  horse  a  few  days  previously  from  C,  and  does 
not  know  whether  there  are  any  incumbrances  on  the  horse,  but  will 
sell  what  interest  he  has,  and  if  B  purchases  on  these  representations, 
he  cannot  sue  A  on  an  implied  warranty  of  title  if  it  subsequently 
develops  that  D  has  a  mortgage  on  the  horse.  If,  however,  A  offers 
to  sell  B  a  horse,  saying  nothing  about  the  matter  of  title,  and  B 
purchases  the  horse,  and  later  is  obliged  to  yield  possession  to  C, 
who  holds  a  mortgage,  B  may  recover  the  purchase  price  of  the  horse 
from  A  upon  an  implied  warranty. 

Formerly,  a  distinction  was  drawn  between  sales  of  property  in 
the  possession  of  the  seller,  and  of  property  in  the  possession  of  some 


COMMERCIAL  LAW  177 

third  person,  making  the  seller  not  liable  upon  an  implied  warranty 
in  the  latter  case.  At  present,  however,  the  tendency  of  the  courts 
is  to  make  the  seller  liable  upon  an  implied  warranty,  regardless  of 
whether  the  property  is  in  his  possession,  or  in  the  possession  of  a 
third  person  at  the  time  the  sale  is  made.  \\Tien  a  person  sells 
chattel  property,  not  as  owner,  but  in  an  official  capacity,  or  as  an 
agent,  there  is  no  implied  warranty  of  title.  Common  examples  of 
this  principle  are  sales  by  a  pledgee,  mortgagee,  sheriff,  guardian, 
administrator,  assignee,  or  trustee  in  bankruptcy. 

217.  Implied  Warranty  of  Wholesomeness  in  Sales  of  Food. 
In  the  sale  of  articles  to  be  used  for  food,  there  is  an  implied  warranty 
that  the  article  sold  is  wholesome  and  fit  for  the  purpose  which  it  is 
sold.  This  rule  is  based  upon  the  principle  of  public  policy,  that  it  is 
the  duty  of  the  state  to  protect  life  and  health.  A,  a  grocer,  sold 
canned  tomatoes  to  B,  for  use  in  B's  family.  The  tomatoes  con- 
tained poisonous  adulteration.  A  was  held  liable  in  damages  to  B, 
for  breach  of  implied  warranty  of  wholesomeness  of  the  article  sold 
for  food.  Some  jurisdictions  hold  that  this  rule  does  not  apply  in 
sales  of  food,  where  the  article  is  not  sold  to  a  consumer.  That  is, 
if  the  article  is  sold  by  a  wholesaler  to  a  jobber,  or  to  a  retailer,  the 
warranty  does  not  apply,  but  where  it  is  sold  by  anyone  to  a  consumer, 
it  does  apply. 

218.  Implied  Warranty  in  Sales  by  Sample.  When  goods  are 
not  inspected  by  the  buyer,  but  a  sample  is  furnished  him,  from 
which  he  purchases,  there  is  an  implied  warranty  that  the  goods  sold 
correspond  with  the  sample.  The  fact  that  a  sample  of  goods  is 
exhibited  by  the  seller  and  examined  by  a  purchaser  does  not  neces- 
sarily mean  that  a  resulting  sale  is  one  by  sample.  The  sample 
exhibited  may  not  be  claimed  by  the  seller  to  represent  in  every 
respect  the  article  to  be  furnished,  or  the  purchaser  may  not  desire  to 
purchase  according  to  the  sample.  To  constitute  a  sale  by  sample, 
a  sample  must  be  exhibited  by  the  seller  upon  a  representation  that 
it  is  a  sample  of  the  goods  to  be  sold.  If  exhibited  for  any  other 
purpose,  the  resulting  sale  will  not  be  a  sale  by  sample.  The  pur- 
chaser must  make  the  purchase  relying  upon  the  sample,  and 
with  the  understanding  that  the  goods  are  to  correspond  with 
the  sample.  If  the  goods  are  present  at  the  time  the  sale  is  made, 
and  the  purchaser  inspects   them,  or  has  the  opportunity  to  inspect 


178  COMMERCIAL  LAW 

them,  in  the  absence  of  fraud,  he  cannot  claim  that  the  sale  is  by 
sample. 

219.  Implied  Warranty  of  Merchantability.  Where  goods 
which  have  not  been  inspected  or  selected  by  the  purchaser  are  or- 
dered to  be  delivered  in  the  future,  there  is  an  implied  warranty  that 
they  are  of  average  quality.  This  is  called  an  im'plied  warranty  oj 
merchantability.  A  ordered  a  "Buckeye"  mowing  machine  of  B, 
to  be  delivered  the  following  week.  B  delivered  a  machine  which 
would  not  cut  grass.  B  was  held  liable  to  A  upon  an  implied  war- 
ranty of  merchantability.  If  A  had  inspected  the  machine,  and 
made  the  purchase  upon  his  own  selection,  in  the  absence  of  fraud 
on  the  part  of  B,  A  would  have  no  redress.  But,  in  case  the  article 
is  purchased  without  opportunity  for  inspection,  to  be  manufactured 
or  delivered  in  the  future,  there  is  an  implied  warranty  that  the  article 
is  an  average  one  of  its  kind. 

220.  Implied  Warranty  of  Fitness  of  Goods  for  the  Purpose 
for  Which  They  are  to  Be  Used.  When  a  purchaser  makes  known 
to  a  seller  the  purpose  for  which  the  article  is  to  be  used,  and  the 
seller  is  himself  the  manufacturer  or  grower  of  the  article,  there  is 
an  implied  warranty  that  the  article  is  fit  for  the  purpose  for  which 
it  is  to  be  used.  This  applies  only  to  articles  to  be  manufactured  or 
delivered  in  the  future,  and  not  to  articles  inspected  and  selected 
by  the  purchaser.  If  A  goes  to  B,  a  manufacturer,  and  tells  him  he 
desires  to  have  manufactured  an  instrument  to  hold  liquid  soap 
suitable  for  the  use  of  workingmen  in  shops,  and  B  agrees  to  manu- 
facture and  sell  such  an  article,  there  is  an  implied  warranty  on  B's 
part  that  the  soap-holders  will  be  suitable  for  the  purpose  for  which 
they  are  to  be  used.  If,  however,  A  furnishes  B  plans  for  the  manu- 
facture of  a  liquid  soap-holder,  and  orders  a  quantity,  there  is  no 
implied  warranty  on  B's  part  that  the  articles  will  be  fit  for  the  pur- 
pose intended.  A  in  this  case  relied  upon  his  own  judgment.  B's 
contract  is  fulfilled  when  he  furnishes  the  article  according  to  A's 
plans.  The  work  must,  of  course,  be  done  in  a  workmanlike 
manner,  free  from  defects  of  material  and  workmanship.  This 
implied  warranty  of  fitness  of  an  article  for  the  purpose  for 
which  it  is  to  be  used,  applies  only  where  the  purchaser  reveals 
the  purpose  of  the  article  to  the  grower  or  manufacturer  who 
agrees  to  furnish  such  an  article.     It  does  not  apply  to  articles 


COMMERCIAL  LAW  179 

furnished  according  to  furnished  plans,  or  to  articles  selected  by  the 
purchaser. 

221.  Remedies  for  Breach  of  Warranty.  In  case  of  breach  of 
warranty,  the  purchaser  may  bring  a  suit  for  damages  against  the 
seller,  or  he  may  promptly  return  the  goods,  and  recover  the  purchase 
price.  The  latter  remedy  is  called  rescission.  In  case  of  breach  of 
an  express  warranty,  in  most  jurisdictions  the  remedy  is  the  same  as 
for  breach  of  implied  warranty.  In  some  states,  however,  the 
buyer  is  not  permitted  to  return  the  goods  and  sue  for  the  purchase 
price,  but  is  restricted  to  an  action  for  damages. 

222.  Seller's  Lien,  Delivery  to  Carriers,  and  Stoppage  in  Tran- 
situ. In  case  of  sales  for  cash,  the  seller  has  the  right  to  retain  pos- 
session of  the  goods  until  he  receives  payment  of  the  purchase  price. 
If  the  goods  are  sold  on  credit,  or  if  the  seller  agrees  to  deliver  at  a 
certain  place,  the  seller  must  comply  with  his  contract.  But  if  the 
purchaser  becomes  insolvent  before  the  goods  are  delivered,  the 
seller  may  retain  possession  until  paid.  He  is  not  obliged  to  deliver 
goods  on  credit,  even  though  such  is  his  contract,  if  the  purchaser 
subsequently  becomes  insolvent.  The  right  of  a  seller  to  retain 
possession  of  goods  until  the  purchase  price  is  paid  is  called  the 
seller's  lien.  This  lien  is  lost  by  the  seller's  delivery  of  the  goods  to 
the  purchaser.  If  the  possession  is  obtained  by  fraud  on  the  part  of 
the  purchaser,  it  is  regarded  as  no  possession,  and  the  seller  may  still 
enforce  his  lien  by  retaking  possession  of  the  property. 

WTiere  goods  are  ordered  by  a  person  in  one  town  from  a  per- 
son in  another  town,  necessitating  delivery  by  a  carrier,  in  the  absence 
of  express  stipulation  to  the  contrary,  title  to  the  goods  passes  to  the 
vendee  upon  delivery  of  same  by  the  vendor  to  the  carrier.  If  yl,  in 
Cleveland,  orders  a  car  of  pine  lumber  from  B,  in  Milwaukee,  for 
$1,500.00,  title  to  the  lumber  passes  to  A  when  B  delivers  the  lumber 
to  the  transportation  company  in  Milwaukee.  If  A  orders  the  lum- 
ber delivered  F.  O.  B.  Cleveland,  title  does  not  pass  to  A  until  the 
lumber  reaches  Cleveland.  If  A  orders  the  lumber,  agreeing  to  pay 
$1,500.00  for  the  same,  "freight  allowed''  to  Cleveland,  title  passes 
to  A  when  B  delivers  the  lumber  to  the  transportation  company  in 
Milwaukee,  even  though  B  must  allow  A  to  deduct  the  freight  from 
the  purchase  price  of  $1,500.00.  This  question  is  important  in  de- 
termining upon  whom  the  loss  falls  in  case  of  damage  of  the  goods 


180  COMMERCIAL  LAW 

while  in  the  hands  of  the  transportation  company.  The  one  who 
has  the  title  at  the  time  the  loss  occurs  must  stand  the  loss.  Such 
party  may  recover  from  the  transportation  company.  This  question 
is  discussed  in  the  chapter  on  Carriers. 

While  a  seller  loses  his  lien  by  delivery  of  possession  of  the  goods 
to  the  purchaser,  if  the  goods  are  delivered  to  a  carrier  and  the  pur- 
chaser becomes  insolvent  before  the  carrier  delivers  the  goods  to  him 
the  seller  may  stop  delivery  of  the  goods,  and  retake  possession  even 
though  title  has  passed  to  the  purchaser.  The  seller's  lien  in  this 
event  revives.  By  insolvency  is  meant  inability  to  pay  one's  debts. 
The  right  of  a  seller  to  stop  a  carrier  from  delivering  goods  to  a  vendee, 
in  case  of  insolvency  of  the  latter,  is  called  stoppage  in  transitu. 
This  question  is  also  discussed  in  the  chapter  on  Carriers. 

A  seller  may  enforce  his  lien  by  keeping  the  goods,  and  suing 
the  purchaser  for  damages,  or  by  selling  the  goods  at  private  or  pub- 
lic sale,  with  notice  to  the  purchaser  of  the  time  and  place  of  sale, 
and  then  by  suing  the  original  purchaser  for  the  difference  between 
the  amount  he  receives  for  the  goods  on  resale,  and  the  amount  the 
original  purchaser  agreed  to  pay.  The  seller  may,  of  course,  hold 
the  goods  and  demand  the  original  purchase  price  of  the  purchaser, 
and  not  yield  possession  until  he  receives  the  purchase  price. 

223.  Remedies  of  Seller.  The  seller's  lien  described  in  the 
previous  section  is  one  of  the  remedies  of  a  seller.  If  the  purchaser 
refuses  to  accept  the  goods,  the  seller  may  keep  or  resell  the  goods, 
and  if  he  receives  less  than  the  original  purchaser  agreed  to  pay,  he 
may  recover  the  difference  as  damages  from  the  original  purchaser. 
For  example,  A  agreed  to  manufacture  and  deliver  a  specially  con- 
structed cash  register  for  B  for  $500.00.  When  it  was  completed, 
B  refused  to  accept  same.  A  sold  it  for  $200.00,  the  fair  market 
price,  and  recovered  from  B,  $300.00  as  damages  for  B's  breach  of 
contract.  If  the  purchaser  accepts  the  goods  and  fails  to  pay  for 
them  when  due,  the  seller  may  sue  and  recover  the  entire  purchase 
price,  together  with  damages  and  expenses  which  are  necessarily 
connected  therewith. 

224.  Remedies  of  Purchaser.  W^here  title  has  not  passed  to 
the  purchaser,  if  the  seller  refuses  or  fails  to  deliver  goods  according 
to  the  contract  of  sale,  the  purchaser  may  go  into  the  market  at  the 
time  and  place  of  delivery  and  purchase   goods,   and   if   obliged 


COMMERCIAL  LAW  181 

to  pay  more  tiian  the  original  contract  price,  he  may  recover  the 
excess  from  the  seller.  For  example,  suppose  A  purchases  five  hun- 
dred pounds  of  lard  of  B  for  $60.00,  B  agreeing  to  deliver  the  lard 
October  30th,  at  Chicago.  If  B  fails  to  deliver  the  lard  in  Chicago, 
October  30th,  A  may  purchase  lard  of  the  same  quality  in  Chicago, 
and  if  he  is  obliged  to  pay  $90.00  for  the  same,  he  may  recover  $30.00 
damages  from  B.  If  there  is  no  market  at  the  place  of  delivery 
mentioned  in  the  contract,  the  purchaser  may  purchase  at  the  nearest 
market.  If  the  purchaser  makes  the  purchase  for  a  particular  pur- 
pose, which  he  makes  known  to  the  seller  at  the  time  the  sale  is  made, 
and  he  is  specially  damaged  by  reason  of  the  failure  of  the  seller  to 
keep  his  contract,  special  damages  may  be  recovered  for  losses  arising 
by  reason  of  the  special  circumstances.  If  title  to  the  goods  has 
passed  to  the  purchaser,  in  case  the  seller  refuses  to  deliver  them,  the 
purchaser  may  bring  an  action  of  replevin  to  recover  their  possession. 
Replevin  is  a  possessory  action.  (See  chapter  on  Courts  and  Legal 
Remedies.) 


QUIZ  QUESTIONS 

BANKING,  LOANS,  MONEY,  AND  CREDITS 

1.  Define  a  bank. 

2.  Classify  banks. 

3.  How  are  national  banks  created? 

4.  What  are  state  banks? 

5.  Define  and  distinguish  banks  of  discount,  banks  of  circula- 
tion, and  banks  of  deposit. 

6.  Are  most  banks  incorporated  companies? 

7.  What  are  the  powers  of  an  incorporated  bank? 

8.  Do  banks  have  the  power  to  deal  in  real  estate? 

9.  Do  banks  have  the  power  to  collect  commercial  paper? 

10.  WTiat  are  bank  deposits? 

11.  Is  a  bank  required  to  receive  deposits  from  any  one  who 
tenders  them? 

12.  What  name  is  applied  to  the  person  authorized  to  receive 
bank  deposits? 


182  COMMERCIAL  LAW 

13.  Do  savings  banks  permit  their  customers  to  draw  their 
deposits  by  check? 

14.  Distinguish  general  and  special  deposits. 

15.  Define  check. 

16.  What  kinds  of  banks  do  a  checking  business  ? 

17.  By  what  process  may  a  depositor  withdraw  money  from  a 
savings  bank? 

18.  Define  a  paid  voucher. 

19.  WTien  do  banks  return  checks  to  their  customers? 

20.  \Mien  are  checks  payable? 

2L     What  should  a  customer  do  with  paid  checks  when  they  are 
received  from  his  bank? 

22.  When  must  checks  be  presented  for  payment? 

23.  Is  a  bank  required  to  pay  the  checks  of  its  depositors? 

24.  If  a  bank  refuses  to  pay  a  check  what,  if  anything,  must 
the  holder  do  to  hold  the  maker  liable? 

25.  Are  national  banks  permitted  to  make  loans  on  real  estate? 

26.  Are  savings  banks  permitted  to  make  loans  on  real  estate? 

27.  Define  credit. 

28.  By  what  means  is  credit  information  furnished? 

29.  Distinguish  credit  and  capital. 

30.  Are  forged  negotiable  instruments  void  or  voidable? 

'SI.     Is  a  bank  liable  for  paying  forged  checks,  or  must  the 
depositor  whose  signature  is  forged  stand  the  loss? 

32.  If  a  forgery  is  not  reported  by  a  depositor  until  six  months 
after  it  was  committed,  who  must  stand  the  loss? 

33.  Is  a  bank  liable  if  it  pays  a  bond  Me  holder  a  check  payable 
to  bearer? 

34.  Under  what  laws  are  national  banks  created? 

35.  Does   the   United    States   Constitution   expressly   provide 
for  the  creation  of  national  banks? 

36.  ^Vhat  United  States  ojBBcer  has  supervision  over  national 
banks? 

37.  Are  national  banks  furnished  with  circulating  notes?     If 
so,  in  what  amounts? 

38.  In  case  of  the  bank's  insolvency,  what  is  the  liability  of 
national  bank  stockholders? 

39.  ^Vllat  rate  of  interest  can  national  banks  charge? 


COMMERCIAL  LAW  183 

40.     Can  national  banks  buy  and  sell  bonds? 

4L     What  penalty  is  imposed  upon  national  banks  for  usury? 

42.  Define  and  distinguish  savings  banks  and  trust  companies. 

43.  Are  clearing  houses  banks?     WTiat  are  the  functions  of 
clearing  houses? 

44.  In  what  two  ways  is  the  term  money  used? 
45      WTiat  is  legal  tender? 

46.  Are  silver  certificates  legal  tender? 

47.  Define  discount. 

48.  Distinguish  discount  and  purchase  of  negotiable  paper. 

49.  Are  banks  permitted  to  purchase  negotiable  paper  at  a 
profit  in  excess  of  legal  rates  of  interest? 

50.  Are  individuals  and  business  concerns  permitted  to  purchase 
negotiable  paper  at  a  profit  in  excess  of  legal  rates  of  interest. 

5L  Define  exchange. 

52.  Distinguish  foreign  and  domestic  exchange 

53.  Define  interest. 

54.  Define  and  give  an  example  of  usury. 

55.  What  is  the  usual  penalty  for  usury? 

INSURANCE 

1.  Define  insurance. 

2.  Are  insurance  companies  controlled  by  the  legislatures  of 
the  states? 

3.  May  an  individual  or  a  partnership  enter  into  insurance 
contracts? 

4.  Is  insurance  business  interstate  commerce  if  transacted 
between  citizens  of  different  states? 

5.  May  one  state  exclude   insurance  companies  of  another 
state  from  transacting  business  within  its  territory? 

6.  Does  an  insurance  contract  require  all  the  elements  of  an 
ordinary  contract? 

7.  In  what  way  does  an  insurance  contract  dift'er  from  an 
ordinary  contract? 

8.  How  many  parties  are  there  to  an  insurance  contract? 
0.     Define  undenvriters. 

10.     Define  beneficiary. 


184  COMMERCIAL  LAW 

IL  Name  the  principal  kinds  of  insurance  written  at  the  present 
time. 

12.  Define  and  give  an  example  of  insurable  interest. 

13.  Must  an  insurance  contract  be  in  writing  to  be  bind- 
ing? 

14.  Are  insurance  contracts  within  the  Statute  of  Frauds? 

15.  Define  binder. 

16.  Define  warranty  as  used  in  an  insurance  contract. 

17.  Distinguish  warranty  as  used  in  insurance  contracts  from 
warranty  as  used  in  contracts  of  sale. 

18.  Define  representatioii  as  used  in  connection  with  insurance 
contracts. 

19.  Distinguish  warranty  and  representations. 

20.  Does  breach  of  warranty  avoid  a  contract  of  insurance? 

21.  Does  breach  of  representation  discharge  an  insurance  con- 
tract? 

22.  Define  life  policy. 

23.  Define  term  policy. 

24.  Define  tontine  policy. 

25.  Define  marine  insurance. 

26.  What  implied  warranty  enters  into  a  policy  for  marine 
insurance? 

27.  Define  general  average. 

28.  Define  standard  policy. 

29.  If  a  policy  of  insurance  contains  no  stipulation  relative  to 
suicide,  and  the  insured  takes  the  policy  intending  to  commit  suicide* 
and  does  commit  suicide,  is  the  policy  enforceable? 

30.  If  an  insurance  policy  contains  a  suicide  clause,  and  the 
insured  commits  suicide  while  insane,  is  the  policy  enforceable? 

31.  May  an  insurance  company  stipulate  against  suicide  in 
such  a  manner  as  to  avoid  the  policy  if  the  insured  suicides  when 
insane? 

32.  Define   and   distinguish  fidelity   and    casualty   insurance. 

33.  ^Vhat  is  re-insurancef 

34.  Is  a  company  writing  a  policy  of  re-insurance  liable  to  the 
party  originally  insured? 

35.  May  a  company  re-insure  at  greater  risk  than  it  itself  has 
insured? 


COMMERCIAL  LAW  185 

36.  Can  a  fire  insurance  policy  be  assigned  before  a  loss  has 
occurred? 

37.  Can  a  fire  insurance  policy  be  assigned  after  a  loss  has 
occurred? 

38.  Can  a  life  insurance  policy  be  assigned  at  any  time? 

39.  Define  and  distinguish  open  and  valued  policies. 

40.  Define  other  insurance. 

4L  What  limit,  if  any,  is  placed  upon  the  amount  of  life  in- 
surance a  person  may  take? 

42.  May  a  person  insure  personal  property  for  more  than  its 
actual  value? 

43.  If  a  person  insures  his  house  in  three  different  companies 
for  two-thirds  of  its  value  in  each  company,  in  case  of  loss  how  much 
an  he  recover,  if  anything,  on  each  policy? 

SURETYSHIP 

1.  Define  suretyship. 

2.  Is  a  suretyship  obligation  a  contract? 

3.  What  contracts  is  the  term  suretyship  used  to  designate? 

4.  How  many  parties  are  there  to  a  suretyship  contract? 

5.  Define  principal. 

6.  Give  an  example  of  a  suretyship  contract. 

7.  Define  promisor. 

8.  Define  creditor  to  a  suretyship  contract. 

9.  Give  the  different  technical  names  that  may  be  applied  to 
a  promisor  of  a  suretyship  contract  depending  upon  the  nature  of  the 
liability. 

10.  Define  surety. 

11.  Give  an  example  of  a  contract  of  a  surety. 

12.  Is  the  liability  of  a  surety  conditional  upon  that  of  his 
principal. 

13.  Define  guarantor. 

14.  A  promises  a  creditor  of  B  to  pay  B's  debt  if  B  does  not. 
Is  A's  contract  that  of  a  surety  or  of  a  guarantor? 

15.  In  commercial  practice  what  form  of  suretyship  contract 
is  most  frequently  used,  that  of  a  surety  or  of  a  guarantor? 

10.     Define  indorser. 


18G  COMMERCIAL  LAW 

17.  Is  an  endorser's  contract  found  outside  of  negotiable  instru- 
ments? 

18.  Is  an  indorser  bound  by  any  implied  contract? 

19.  What  are  the  warranties  of  an  indorser? 

20.  Is  consideration  a  necessary  element  of  a  contract  of 
suretyship? 

21.  If  a  suretyship  contract  is  part  of  the  transaction  which 
it  secures  must  it  be  supported  by  a  separate  consideration? 

22.  Must  any  contracts  of  suretyship  be  in  writing? 

23.  Is  an  oral  contract  of  suretyship  illegal? 

24.  WTiat  is  meant  by  the  Statute  of  Frauds  as  applied  to 
suretyship  contracts? 

25.  Define  general  guaranty. 

26.  Define  limited  guaranty. 

27.  Define  special  guaranty. 

28.  Define  continuing  guaranty. 

29.  What  kinds  of  notice  may  a  guarantor  be  entitled  to? 

30.  When,  if  at  all,  is  a  guarantor  entitled  to  notice  of  default 
of  his  principal? 

31.  When,  if  at  all,  is  a  guarantor  entitled  to  notice  of  accept- 
ance of  his  guaranty  by  a  creditor? 

32.  If  A  is  surety  for  B  upon  B's  debt  to  C  of  $100.00  and  B 
settles  his  debt  with  C  for  $50.00,  can  C  hold  A  for  the  balance? 

33.  If  A  guarantees  B's  debt  to  C  of  $100.00  due  one  year  and 
with  interest  at  6%,  and  B  without  A's  consent  reduces  the  interest 
to  5%,  is  A  thereby  discharged? 

34.  If  A  guarantees  B's  debt  to  C  of  $100.00  payable  in  one 
year,  and  C  without  A's  consent  extends  the  time  of  payment  six 
months  upon  B^s  agreement  to  pay  6%  interest,  is  A  thereby  dis- 
charged? 

35.  Is  fraud  practiced  by  the  principal  upon  the  promisor  to 
a  suretyship  contract,  a  defense  to  the  promisor  in  an  action  brought 
by  the  creditor? 

36.  In  the  absence  of  special  statute  can  a  promisor  to  a  surety- 
ship contract  compel  by  notice  a  creditor  to  sue  a  principal? 

37.  Are  surety  companies  favorites  of  the  law? 

38.  Define  subrogation. 

39.  Give  an  example  of  subrogation. 


COMMERCIAL  LAW  187 

40.     Define  indemnity  as  applied  to  a  suretyship  contract. 

4L  A  guarantees  B's  debt  to  C  of  $100.00  upon  a  promissory 
note.  B  defaults  and  A  pays  the  debt.  A  then  sues  B  for  $100.00 
upon  the  promissory  note.  Is  this  an  example  of  indemnity  or  sub- 
rogation? May  A  sue  B  for  $100.00  independently  of  the  promissory 
note? 

42.  Define  contribution. 

43.  A,  B,  and  C  guarantee  D's  debt  to  E  of  $300.00.  E  sues 
A  and  collects  $100.00.     Can  A  sue  B  and  C  for  $33.33  each? 

PERSONAL  PROPERTY 

1.  Define  personal  property. 

2.  Classify  personal  property. 

3.  Distinguish  chattels  real  from  chattels  personal. 

4.  Define  and  give  an  example  of  chose  in  action. 

5.  Define  and  give  an  example  of  chose  in  possession. 

6.  How  may  title  to  personal  property  be  acquired? 

7.  May  a  person  obtain  title  to  personal  property  by  find- 
ing it? 

8.  How  can  personal  property  be  transferred? 

9.  Upon  death  of  the  owner,  to  whom  does  title  to  personal 
property  pass? 

SALES 

1.  Distinguish  ownership  and  possession  of  personal  property. 

2.  May  title  and  possession  of  personal  property  be  in  different 
places? 

3.  Define  sale. 

4.  How  does  a  sale  differ  from  a  contract  to  sell  ? 

5.  A  promises  to  deliver  a  car  of  coal  to  B  the  following  month 
in  consideration  of  B's  promise  to  pay  A  $300.00  upon  delivery  of 
the  coal.     Is  the  transaction  a  sale  or  a  contract  to  sell? 

6.  In  a  contract  to  sell,  if  the  property  is  destroyed  by  fire 
before  the  property  is  delivered,  who  stands  the  loss? 

7.  Distinguish  barter  from  sale. 

8.  A  agrees  to  deliver  to  B  one  hundred  bushels  of  apples 
for  twenty  tons  of  coal  at  $5.00  per  ton.  Is  the  transaction  a  sale 
or  a  barter? 


188  COMMERCIAL  LAW 

9.     Define  conditional  sale. 

10.  At  the  present  time  is  a  vendor  of  a  conditional  sale  contract 
permitted  to  take  possession  of  the  property  after  90%  of  the  pur- 
chase price  has  been  paid. 

IL  A  leaves  his  automobile  at  B's  shop  for  repairs.  Is  this 
transaction  a  sale? 

12.  Distinguish  sale  from  bailment. 

13.  What  kinds  of  personal  property  may  be  the  subject  of  a 
sale? 

14.  May  personal  property  to  be  manufactured  be  the  subject 
of  a  present  sale? 

15.  ^Vhat  is  meant  by  the  Statute  of  Frauds  as  applied  to  sales? 

16.  WTiat  contracts  of  sales  must  be  in  writing? 

17.  WTien  must  personal  property  sold  be  delivered? 

18.  In  the  absence  of  any  express  agreement  as  to  delivery, 
when  and  by  whom  most  personal  property  be  delivered? 

19.  If  a  sale  is  made  in  which  delivery  is  to  be  made  in  the 
future  may  title  pass  to  the  purchaser  at  once? 

20.  WTien  does  title  pass  to  the  purchaser  in  a  sale  of  personal 
property? 

21.  Does  the  fact  that  delivery  is  to  be  made  in  the  future,  of 
itself,  prevent  title  passing  to  the  purchaser  at  the  time  the  sale  is  made? 

22.  A  sells  a  desk  to  B  for  $10.00,  agreeing  to  revarnish  the 
desk  and  deliver  same  to  B  the  following  Saturday,  ^^^len  does  title 
to  the  desk  pass  to  B? 

23.  What,  if  anything,  does  intention  of  the  parties  have  to  do 
with  the  passing  of  title  to  the  purchaser? 

24.  In  the  absence  of  an  express  agreement  when  must  the 
purchase  price  be  paid? 

25.  Is  the  seller  permitted  to  retain  possession  of  the  property 
sold  until  he  receives  the  purchase  price? 

26.  B,  by  means  of  fraud,  purchases  a  bicycle  from  A.  B 
sells  it  to  C,  who  does  not  know  of  the  fraud.  Can  A  recover  the 
bicycle  from  Cf 

27.  A  purchases  a  bicycle  from  B  telling  B  that  he  is  C.  B 
knows  C  by  reputation  and  thinks  that  he  is  selling  to  C.  A  sells 
the  bicycle  to  D.     Can  B  obtain  possession  of  the  bicycle  from  Df 

28.  Define  Caveat  Emptor. 


COMMERCIAL  LAW  189 

29.  Does  the  rule  of  Caveat  Emptor  apply  if  the  seller  expressly 
warrants  the  goods  sold? 

30.  Define  express  warranty. 

31.  A  sells  a  horse  to  B  assuring  B  that  the  horse  is  perfectly 
sound.     The  horse  has  blemishes.     Does  A  warrant  the  horse? 

32.  Define  implied  warranty. 

33.  Enumerate  the  most  common  implied  warranties. 

34.  Does  an  implied  warranty  of  title  accompany  every  sale? 

35.  A  purchases  an  automobile  at  a  sheriff's  sale.  Tlie  auto- 
mobile is  mortgaged.  May  the  mortgagee  take  the  auto  from  Af 
If  so,  can  A  recover  on  an  implied  warranty  from  the  sheriff? 

36.  WTiat  is  meant  by  implied  warranty  of  wholesomeness  of 
food? 

37.  Does  this  warranty  extend  to  any  purchaser? 

38.  Give  an  example  of  an  implied  warranty  in  a  sale  by  sample. 

39.  Does  the  implied  warranty  of  merchantability  apply  when 
the  goods  are  selected  and  inspected  by  the  purchaser? 

40.  Give  an  example  of  a  sale  in  which  there  is  an  implied 
warranty  of  fitness  for  the  purpose  for  w  hich  the  goods  are  to  be  used. 

4L  Does  this  implied  warranty  exist  if  the  goods  are  con- 
structed and  furnished  according  to  a  model  furnished  by  the  buyer? 

42.  Define  rescission  of  a  contract. 

43.  May  a  contract  of  sale  be  rescinded  for  breach  of  warranty? 

44.  Generally,  what  is  a  purchaser's  remedy  for  breach  of 
warranty? 

45.  Define  lien. 

46.  Give  an  example  of  seller's  lien. 

47.  Define  stoppage  in  transitu. 

48.  A,  in  Cleveland,  orders  goods  of  B  in  Chicago.  B  delivers 
the  goods  to  the  Adams  Express  Company,  addressed  to  A.  The 
goods  are  lost  in  a  railway  wreck.     Who  must  bear  the  loss,  A  or  B? 

49.  A  sells  a  carriage  to  B.  B  refuses  to  pay  for  the  same. 
If  A  has  not  delivered  the  carriage  to  B  may  he  sue  B  for  damages? 

50.  A  purchases  a  carriage  from  B.  A  tenders  the  price,  but 
B  refuses  to  deliver  the  carriage.  May  A  obtain  possession  of  the 
carriage  by  legal  action? 

5L  May  A  sue  B  for  damages  for  refusing  to  deliver  the 
carriage? 


COMMERCIAL  LAW 

PART  IV 


BAILMENTS 

225.  Bailment  Defined.  A  bailment  has  been  defined  to  be 
"A  delivery  of  goods  for  the  execution  of  a  special  object,  beneficial 
to  the  bailor,  the  bailee  or  both,  upon  a  contract  express  or  implied, 
to  carry  out  this  object,  and  dispose  of  the  property  in  conformity 
with  the  purpose  of  the  trust."  It  is  the  giving  possession  of  personal 
property  to  another  for  the  purpose  of  having  the  property  cared  for, 
improved  or  used,  with  the  understanding  that  when  the  purpose  of 
the  delivery  is  fulfilled,  the  property  shall  be  returned  to  the  bailor 
or  disposed  of  according  to  his  directions. 

A  bailment  differs  from  a  sale  in  that  the  title  to  the  property 
remains  in  the  bailor,  and  possession  is  given  the  bailee,  while  in  a 
sale,  the  title  or  ownership  of  the  property  is  transferred  to  the  pur- 
chaser, while  possession  may  remain  in  the  seller.  Bailment  is  a 
broad  subject  covering  many  transactions.  Loans,  pledges,  and  de- 
liveries of  property  of  every  nature,  in  which  mere  possession  is  given 
another  without  transfer  of  title  are  included.  If  A  leaves  his  watcli 
with  B,  a  jeweler,  for  repairs,  the  transaction  is  a  bailment.  If  A 
delivers  property  to  B,  a  transportation  company,  to  be  conveyed  to 
C,  the  transaction  is  a  bailment.  If  A  loans  his  knife  to  B,  the  trans- 
action is  a  bailment. 

226.  Parties  to  a  Bailment  Contract.  There  are  two  parties  to 
a  bailment  contract.  The  one  who  gives  possession  of  chattel  prop- 
erty to  another,  reserving  title  to  himself,  is  called  the  bailor,  and  the 
one  who  receives  possession  of  the  property  under  these  conditions 
is  called  the  bailee.  A  bailment  is  a  contract.  Parties  to  a  bailment 
must  be  competent  to  contract.  (See  Competency  oj  Parties,  chapter 
on  Contracts.)  Parties  under  legal  age  may  avoid  contracts  of  bail- 
ment. If  A,  fifteen  years  of  age,  hires  a  horse  from  B,  a  liveryman, 
for  one  hour  for  $2.00,  B  cannot  compel  A  to  carry  out  his  con- 


11)2  COMMERCIAL  LAW 

tract  if  A  objects  on  the  ground  of  infancy.  But  if  A  injures  the  horse 
he  is  liable  in  damages  to  B.  An  infant  is  liable  for  his  torts,  but 
not  for  his  contracts. 

227.  Classification  of  Bailments.  Bailments  are  usually  divided 
into  three  classes;  bailments  for  the  sole  benefit  of  the  bailor,  bail- 
ments for  the  sole  benefit  of  the  bailee,  and  bailments  for  the  benefit 
of  both  the  bailor  and  bailee.  A  common  example  of  a  bailment  for 
the  sole  benefit  of  the  bailor  is  a  delivery  of  property  to  the  bailee,  to 
be  kept  by  the  bailee  gratuitously  for  the  accommodation  of  the  bailor, 
or  delivery  of  property  to  the  bailee  to  have  work  performed  on  it, 
without  compensation  to  the  bailee.  Examples  of  bailments  for 
the  sole  benefit  of  the  bailee  are  loans  to  the  bailee  without  compen- 
sation to  the  bailor.  Bailments  for  the  mutual  benefit  of  bailor  and 
bailee  include  deliveries  of  property  to  carriers,  pledges,  renting 
property,  or  hiring  the  bailee  to  perform  work  on  the  property  bailed, 
or  hiring  the  bailee  to  care  for  the  property. 

228.  Elements  of  a  Contract  of  Bailment.  It  is  sometimes  said 
that  a  bailment  for  the  sole  benefit  of  the  bailor  is  not  a  contract  by 
reason  of  there  being  no  consideration.  A  consideration  may  con- 
sist of  any  benefit  to  the  party  making  a  promise,  or  any  detriment  to 
the  one  to  whom  the  promise  is  made.  The  giving  up  of  the  property 
bailed  to  the  bailee  is  considered  a  detriment  to  the  bailor,  even  though 
the  bailee  receives  no  benefit.  For  a  transaction  to  constitute  a  bail- 
ment, there  must  be  a  delivery  of  the  property  bailed  to  the  bailee, 
and  an  acceptance  by  him  of  the  property.  This  delivery  may  be 
actual  or  constructive,  as  by  delivery  of  a  warehouse  receipt,  or  a 
bill  of  lading.  The  delivery  must  be  suflficient  to  enable  the  bailee 
to  secure  the  possession  of  the  goods,  and  to  control  the  possession 
during  the  period  to  be  covered  by  the  bailment,  to  the  exclusion  of 
the  bailor.  The  property  must  be  in  existence  to  be  bailed.  A  con- 
tract of  bailment  need  not  be  express;  it  may  be  implied  as  well — 
a  thief  or  a  finder  of  property  is  a  bailee  for  the  true  owner. 

229.  Title  to  Property  Bailed.  The  title  to  property  bailed 
does  not  pass  to  the  bailee.  INIere  possession  passes  to  the  bailee. 
It  is  not  necessary  that  the  bailor  have  title  to  the  property  to  bail  it. 
If  he  has  right  of  possession  he  may,  under  certain  circumstances, 
bail  it.  A  may  rent  a  livery  stable,  including  horses  and  carriages, 
of  B,  for  three  years,  with  the  understanding  that  he  will  operate 


COMMERCIAL  LAW  193 

the  business  in  the  usual  way.  A  does  not  have  title  to  the  horses  and 
carriages,  but  he  may  hire  them  to  C,  or  to  anyone  he  chooses.  This 
transaction  with  C  constitutes  a  bailment,  in  which  the  bailor  does 
not  have  title  to  the  property  bailed.  He  has,  however,  sufficient 
right  of  possession  to  enter  into  a  bailment  contract.  The  principal 
distinction  between  a  bailment  and  a  sale  of  personal  property  is 
that,  in  the  latter  case,  title  passes  to  the  purchaser  regardless  of 
change  of  possession  of  the  property,  while  in  the  case  of  a  bailment, 
possession  of  the  property  must  pass  to  the  bailee,  while  title  is  not 
disturbed. 

230.  Bailments  for  the  Sole  Benefit  of  the  Bailor.  Where  per- 
sonal property  is  deposited  with  another  for  safe  keeping,  or  for  the 
purpose  of  having  work  performed  on  it,  without  compensation  to  the 
bailee,  the  transaction  is  called  a  bailment  for  the  sole  benefit  of  the 
bailor.  The  liability  of  a  bailee  for  the  loss  or  injury  of  property 
intrusted  to  his  care,  depends  upon  the  nature  of  the  property  itself, 
and  upon  whether  the  bailee  receives  compensation  for  his  services. 
Three  degrees  of  care  and  negligence,  respectively,  are  recognized 
in  bailments;  slight,  ordinary  and  great  care,  and  gross,  ordinary  and 
slight  negligence.  W^hat  constitutes  ordinary  care  or  negligence  is 
determined  by  considering  what  a  man  of  ordinary  prudence  would 
do  under  the  circumstances  in  question.  Any  case  of  negligence 
above  or  below  this  standard  constitutes  great  care  or  gross  neg- 
ligence, li  A,  in  going  to  lunch,  leaves  his  umbrella  in  B's  office, 
and  the  umbrella  is  stolen,  B  is  not  liable  to  ^,  if  he  exercised  slight 
care.  If  ^,  a  lawyer,  is  obliged  to  go  to  police  court  to  try  a  criminal 
case,  and  leaves  his  diamond  pin  with  B,  a  brother  attorney,  B  is 
obliged  to  exercise  only  slight  care,  as  in  the  case  of  the  umbrella, 
and  is  liable  only  for  gross  negligence.  But  slight  care  means  a 
much  greater  degree  of  care  in  case  of  the  diamond  pin  than  in 
the  case  of  the  umbrella.  In  case  of  a  bailment  for  the  sole 
benefit  of  the  bailor,  the  bailee  is  obliged  to  exercise  only  slight 
care,  and  is  liable  only  for  gross  negligence.  He  receives  no  com- 
pensation for  the  service,  and  for  this  reason  is  not  obliged  to 
exercise  a  great  degree  of  care.  Property  cared  for  gratuitously  for 
the  accommodation  of  the  bailor,  or  to  be  carried  to  some  place,  or 
to  have  something  done  to  it  gratuitously,  constitutes  this  class  of 
bailments. 


194  COMMERCIAL  LAW 

231.  Bailments  for  Sole  Benefit  of  Bailee.  Property  loaned  to 
a  bailee  for  the  latter's  accommodation  constitutes  a  bailment  for  the 
sole  benefit  of  the  bailee.  A  borrows  B's  horse  to  drive  to  Y.  A 
pays  B  nothing  for  the  use  of  the  horse.  A  must  exercise  great  care 
in  the  use  of  the  horse,  and  is  liable  to  B  for  slight  negligence.  It  is 
no  defense,  in  case  the  horse  is  injured  while  in  A's  possession,  that  A 
acted  as  an  ordinarily  prudent  man  would  act  under  the  circum- 
stances. He  must  act  as  an  ordinarily  prudent  man  would  act  when 
exercising  great  care.  If,  from  the  circumstances  connected  with 
the  injury  to  the  horse,  it  is  determined  that  an  ordinarily  prudent 
man  would  have  been  guilty  of  slight  negligence  in  the  method  of 
handling  the  horse  or  causing  the  injury,  A  is  liable  to  B  for  the  in- 
jury to  the  horse. 

A  court  said  on  this  point,  "A  bailee  who  is  a  borrower  must  use 
extraordinary  care  to  protect  the  property  loaned  to  him,  and  is 
responsible  for  the  slightest  neglect.  He  must  exercise  all  the  care 
and  diligence  that  most  careful  persons  exercise  in  the  transaction  of 
their  own  affairs." 

If  the  bailee  uses  the  property  for  any  purpose  other  than  that 
for  which  it  was  bailed,  or  if  he  exceeds  the  authority  of  the  bailor  in 
the  use  of  the  property,  he  is  liable  for  injuries  resulting.  For  ex- 
ample, A  borrowed  B's  oxen  to  plow  up  a  hedge.  A  used  the  oxen 
to  draw  a  load  of  stone.  A  stone  rolled  off  the  cart  and  injured  one 
of  the  oxen.    A  was  held  liable  for  the  injury. 

232.  Bailments  for  Benefit  of  Both  Bailor  and  Bailee.  The 
majority  of  bailments  are  for  the  benefit  of  both  bailor  and  bailee. 
This  class  of  bailments  includes  the  hiring  of  personal  property. 
A  rents  B's  automobile  for  three  hours,  at  three  dollars  an  hour. 
This  is  an  example  of  this  class  of  bailments.  This  class  also  in- 
cludes pledges  or  pawns  of  goods.  If  A  pledges  ten  shares  of  stock 
in  a  corporation  to  his  bank  for  a  loan,  this  transaction  constitutes 
this  form  of  bailment.  This  also  includes  the  hiring  of  a  bailee  to 
carry  goods  from  one  place  to  another.  The  most  common  example 
of  this  class  of  bailments  is  that  of  common  carriers.  For  example, 
A  employs  B,  an  express  company,  to  carry  a  package  of  jewelry 
from  Cleveland  to  Chicago.  The  bailment  is  for  the  mutual  benefit 
of  both  A  and  B.  Any  case  in  which  one  party  employs  another  to 
carry  goods  from  one  place  to  another  for  compensation  is  included  in 


COMMERCIAL  LAW  195 

this  class  of  bailments,  and  is  discussed  more  at  length  in  the  chapter 
on  Common  Carriers. 

Hiring  a  person  to  care  for  personal  property  for  compensation 
is  included  in  the  class  of  mutual  benefit  bailments.  A  traveling 
salesman  leaving  his  trunk  and  satchel  with  a  hotel-keeper  is  a  common 
example.  WTiere  one  person  hires  another  to  perform  work  or  serv- 
ices on  the  thing  bailed,  the  transaction  constitutes  a  mutual  benefit 
bailment.  For  example,  if  A  leaves  his  overcoat  with  B,  his  tailor, 
to  be  cleaned  and  pressed,  the  transaction  constitutes  this  form  of 
bailment.  In  mutual  benefit  bailments  the  bailee  has  the  right  to 
use  the  property  bailed  only  for  the  purposes  of  the  bailment.  If  A 
rents  B's  automobile,  he  is  entitled  to  use  it  during  the  period  covered 
by  the  contract.  If  he  rents  it  for  a  particular  designated  trip,  he 
cannot  use  it  for  any  other  trip.  In  a  mutual  benefit  bailment,  when 
the  bailee  hires  out  the  use  of  a  chattel,  there  is  an  implied  contract 
on  his  part  that  the  chattel  is  fit  for  the  purpose  for  which  it  is  to  be 
used,  and  that  it  may  safely  be  used  for  such  purposes.  A  rents  B's 
naphtha  launch  for  the  purpose  of  taking  a  lake  ride.  B  has  care- 
lessly supplied  the  wrong  fuel.  An  explosion  results,  injuring  A. 
B  is  liable  for  the  injury.  In  mutual  benefit  bailments,  the  bailee  is 
obliged  to  exercise  ordinary  care,  and  is  liable  for  ordinary  negligence. 

The  bailee  must  act  as  an  ordinarily  prudent  man  would  act 
under  the  same  conditions  in  protecting  and  caring  for  the  property. 
A  rents  a  typewriter  of  B,  If  the  typewriter  breaks  or  gets 
out  of  order  during  ordinary  usage,  B  must  stand  the  loss.  If  the 
parties  to  a  bailment  of  this  class  specifically  contract  as  to  who  shall 
bear  the  loss  in  case  of  accident,  or  as  to  the  degree  of  care  which 
shall  be  exercised,  these  express  stipulations  prevail. 

233.  Warehousemen  and  Storage  Companies.  A  person  who 
keeps  a  place  for  the  storage  of  goods  for  a  compensation  is  a  ware- 
houseman or  storage-keeper.  In  a  few  states,  public  warehouses  are 
provided  for  by  statute.  In  these  states,  the  statutes  define  the 
duties  and  liabilities  of  warehousemen.  These  public  warehousemen 
are  generally  required  to  take  all  goods  offered  for  storage,  no  matter 
who  the  owner  may  be,  if  the  goods  are  in  condition  to  be  stored 
and  if  the  storage  charges  are  tendered. 

Most  warehouses  operate  their  business  as  private  enterprises. 
A  few  states  provide  by  statute  for  public  warehouses.     Private 


196  COMMERCIAL  LAW 

warehousemen  may  select  their  customers.  They  are  not  required  to 
accept  goods  for  storage  if  they  do  not  so  desire.  The  government 
provides  warehouses  for  the  storage  of  goods  upon  which  customs  or 
duties  are  to  be  paid.  These  warehouses  are  private  enterprises 
authorized  by  the  government  to  act  as  government  warehouses.  The 
government  requires  a  bond  of  these  warehousemen  for  the  protection 
of  itself,  but  the  government  is  in  no  way  responsible  for  the  ware- 
houseman's treatment  of  the  goods,  or  for  breaches  of  contracts 
between  the  warehousemen  and  their  customers. 

Warehousemen  commonly  issue  receipts  for  goods  stored  with 
them.  These  warehouse  receipts  ordinarily  are  made  payable  to 
the  customer's  order,  and  may  be  negotiated.  They  are  not  generally 
recognized  as  negotiable  instruments.  A  few  states  have  statutes 
making  them  negotiable  instruments,  but  outside  these  jurisdictions, 
warehouse  receipts  are  merely  evidences  of  ownership  of  the  property. 
The  purchaser  takes  the  same  right  to  the  property  which  the  original 
bailor  had,  with  the  additional  right  to  sue  the  transferor  if  the  title 
proves  defective. 

A  warehouseman  has  a  lien  on  the  property  for  his  charges. 
The  warehouseman  or  storage-keeper  must  exercise  ordinary  care 
in  the  protection  of  the  property.  The  bailor  must  reveal  to  the 
bailee  the  character  of  the  goods  stored.  If  the  goods  are  of  a  dan- 
gerous character  and  injury  results,  the  bailor  is  responsible  to  the 
bailee  for  damages,  if  he  has  failed  to  reveal  the  dangerous  character 
of  the  goods. 

234.  Degree  of  Care  Required  of  Bailee.  A  bailee  of  property 
is  required  to  exercise  a  certain  degree  of  care  in  the  use,  preserva- 
tion and  protection  of  the  property  placed  in  his  possession,  and  is 
liable  for  a  certain  degree  of  negligence.  The  amount  of  care  a 
bailee  is  obliged  to  exercise,  and  the  amount  of  negligence  for  which 
he  is  liable,  depends  upon  the  kind  of  property  bailed,  and  whether 
the  bailment  is  for  the  sole  benefit  of  the  bailor,  the  bailee,  or  for  the 
mutual  benefit  of  both  the  bailor  and  the  bailee.  If  the  property 
bailed  is  of  great  value,  or  so  delicate  that  it  is  easily  lost,  destroyed 
or  injured,  a  greater  degree  of  care  is  required  on  the  part  of  the 
bailee  than  if  the  property  is  of  litde  value,  or  is  of  such  a  nature  that 
it  is  not  easily  damaged,  lost  or  destroyed. 

If  A,  with  B's  permission,  stores  his  wagon  in  B's  barn,  and  the 


com:\iercial  law  197 

wagon  is  stolen,  B  is  not  liable  unless  he  was  grossly  negligent.  He 
was  not  paid  for  the  bailment,  and  was  obliged  to  exercise  only  sligh  t 
care  in  the  protection  of  the  wagon.  If,  however,  A  leaves  his  watch 
with  B  while  he  attends  a  ball  game,  and  the  watch  is  stolen,  B  must 
have  exercised  greater  care  than  in  the  case  of  the  wagon  by  reason 
of  the  value  and  nature  of  the  property  bailed.  Otherwise,  he  will 
be  liable.  In  this  case  as  well  as  in  the  case  of  the  wagon,  B  received 
no  compensation  for  the  bailment,  and  is  obliged  to  exercise  only 
slight  care  in  the  protection  of  the  property  bailed,  and  is  liable  only 
for  gross  negligence.  WTiat  constitutes  slight  care  and  gross  neg- 
ligence differs  materially  in  the  case  of  the  wagon  and  in  the  case  of 
the  watch. 

In  connection  with  bailments,  care  is  said  to  have  three  degrees, 
great,  ordinary  and  slight.  Negligence  is  also  said  to  have  three 
degrees,  gross,  ordinary  and  slight.  Ordinary  care  or  negligence  is 
the  standard  for  testing  each  case.  After  ordinary  care  or  negligence 
is  determined,  slight  or  great  care,  and  slight  or  gross  negligence  is 
determined  by  ascertaining  whether  the  care  or  negligence  is  above 
or  below  ordinary.  Any  care  greater  than  ordinary  is  great  care; 
any  care  less  than  ordinary  is  slight  care.  Any  negligence  greater 
than  ordinary  is  gross  negligence.  Any  negligence  less  than  ordinary 
is  slight  negligence.  If  a  person  takes  such  precautions  in  the  use, 
preservation,  and  protection  of  the  property  as  an  ordinarily  prudent 
person  would  take  of  his  own  property  under  similar  circumstances, 
he  is  said  to  exercise  ordinary  care.  The  degree  of  care  required  of 
a  bailee  depends  upon  the  kind  of  a  bailment  in  question,  as  well  as 
upon  the  kinds  of  property  bailed. 

If  the  bailment  is  for  the  sole  benefit  of  the  bailor,  the  bailee 
receiving  no  compensation  for  his  inconvenience  and  work,  he  is  re- 
quired to  exercise  only  slight  care,  and  is  liable  only  for  gross  neg- 
ligence. If  the  bailment  is  for  the  sole  benefit  of  the  bailee,  the  bailor 
receiving  no  compensation  for  his  inconvenience  and  the  loss  of  the 
use  of  his  property,  the  bailee  is  required  to  exercise  great  care  in  the 
use  and  preservation  of  the  property,  and  is  liable  for  slight  negli- 
gence. In  case  of  mutual  benefit  bailments,  the  bailee  is  obliged  to 
exercise  ordinary  care  in  the  use  and  protection  of  the  property,  and 
is  liable  for  ordinary  negligence.  Two  classes  of  mutual  benefit 
bailees,  inn-keepers  and  common  carriers,  do  not  come  within  the 


198  COMMERCIAL  LAW 

above  rule.     These  are  known  as  exceptional  mutual  benefit  bail' 
TTienis,  and  are  discussed  under  separate  chapters. 

235.  Rights  of  Bailee  as  Against  Bailor.  A  bailee  has  the  right 
to  keep  the  property,  to  use  it  according  to  the  terms  of  the  contract 
of  bailment,  and  to  defend  this  right  even  against  the  bailor  himself. 
While  the  title  to  the  property  in  question  remains  in  the  bailor,  the 
right  of  possession  during  the  period  covered  by  the  contract  of  bail- 
ment is  in  the  bailee.  He  may  retain  possession  of  the  property  for 
the  purpose  of  the  bailment.  A  bailee  is  entitled  to  use  the  property 
bailed,  and  is  restricted  only  by  the  limitations  of  the  contract.  If 
the  bailee  uses  this  property  in  a  way  not  authorized  by  the  contract 
of  bailment,  he  is  liable  in  damages  to  the  bailor. 

Where  a  mutual  benefit  bailment  requires  the  bailee  to  use  skill 
in  connection  with  the  property  bailed,  the  bailee  must  exercise  a 
degree  of  skill  ordinarily  used  by  persons  who  perform  similar  work. 
If  the  bailee  fails  to  use  this  degree  of  skill,  he  is  liable  in  damages 
to  the  bailor.  For  example,  if  A  leaves  his  horse  with  B,  a  black- 
smith, to  be  shod,  and  B  attempts  the  work,  but  performs  it  so  un- 
skillfully,  or  carelessly  that  the  horse  is  injured  or  lamed  thereby, 
B  is  liable  to  A  for  the  damage  caused. 

236.  Rights  of  Bailee  as  Against  Third  Persons.  A  bailee  has 
the  right  to  keep  the  property  bailed  as  against  third  persons  who 
endeavor  to  interfere  with  his  possession.  The  bailee  is  not  per- 
mitted to  dispute  the  title  of  the  bailor  for  his  own  benefit.  If, 
however,  the  property  is  taken  away  from  the  bailee  by  action  at 
law,  by  one  whose  title  is  superior  to  that  of  the  bailor,  the  bailee  is 
relieved  from  liability  to  the  bailor.  In  this  event,  the  one  who  has 
the  paramount  title  coupled  with  the  right  of  immediate  possession, 
may  take  the  property  from  the  bailee.  If  the  bailee  yields  posses- 
sion to  one  whose  right  of  possession  and  title  are  inferior  to  the 
bailor's,  the  bailee  is  answerable  to  the  bailor  for  any  losses  sustained. 
The  bailee  cannot  confer  good  title  upon  anyone  to  whom  he  attempts 
to  sell  the  property  bailed,  even  though  the  purchaser  buys  without 
notice  of  the  bailment.  Anyone  who  injures  the  property  while  it  is 
in  the  possession  of  the  bailee  is  responsible  either  to  the  bailor  or 
bailee  for  the  damages. 

237.  Lien  of  Bailee.  A  bailee  who  has  performed  work  on 
the  article  bailed,  for  which  he  is  to  be  paid  a  consideration,  is  said 


COMMERCIAL  LAW  199 

to  have  a  lien  for  the  value  of  the  work  performed,  or  materials  fur- 
nished. By  a  lien  is  meant  the  right  of  the  bailee  to  retain  posses- 
sion until  the  value  of  his  labor  or  material  has  been  received.  At 
common  law,  a  livery  stable  keeper  had  no  lien  upon  horses  fed 
and  cared  for.  By  statute  in  most  states,  livery  stable  keepers  now 
have  a  lien  upon  horses  left  with  them.  If  a  bailee  is  employed  to 
perform  work  or  labor  upon  personal  property,  and  the  property 
is  destroyed  without  fault  of  the  bailee  after  part  of  the  work  has  been 
performed,  the  bailee  may  recover  for  the  amount  of  work  performed 
and  materials  furnished,  unless  the  contract  of  bailment  is  to  the 
effect  that  the  entire  job  is  to  be  completed  before  any  payment  is 
made. 

A  bailee  loses  his  lien  by  parting  with  possession  of  the  property. 
At  common  law,  a  bailee  could  not  sell  the  property  to  enforce  his 
lien.  By  statute  in  most  states,  the  bailee  is  permitted  to  sell  the 
property,  by  giving  notice  of  the  time  and  place  of  sale  to  the  bailor, 
or  by  foreclosing  his  lien  by  a  legal  action. 

PLEDGES 

238.  Pledge  Defined.  A  pledge  is  one  form  of  a  mutual  bene- 
fit bailment.  It  is  a  deposit  of  personal  property  by  a  debtor  v/ith  a 
creditor  as  security  for  a  debt,  the  title  to  the  property  remaining  in 
the  debtor  until  the  property  is  disposed  of  by  the  creditor  in  accord- 
ance with  the  express  or  implied  agreement  of  pledge.  A  pledge 
differs  from  a  chattel  mortgage  in  that  possession  of  personal  property 
is  given  a  creditor  for  the  purpose  of  securing  a  debt,  the  title  remain- 
ing in  the  debtor.  In  case  of  a  chattel  mortgage,  the  title  to  the 
personal  property  passes  to  the  mortgagee,  who  is  the  creditor,  sub- 
ject to  revesting  in  the  mortgagor,  who  is  the  debtor,  in  case  of  pay- 
ment of  the  mortgage  debt.  In  a  chattel  mortgage,  possession  of  the 
property  generally  remains  in  the  debtor. 

A  owes  B  $100.00.  He  gives  B  possession  of  a  diamond  ring 
as  security  for  the  debt.  If  A  does  not  pay  the  $100.00  when  due, 
B  may  retain  possession  of  the  ring  until  he  receives  $100.00  from 
A,  or  he  may  sell  the  ring  at  public  sale,  advising  A  of  the  time  and 
place  of  sale.  If  the  ring  sells  for  more  than  $100.00,  B  must  pay 
A  the  excess  of  $100.00. 

Pledges  form  an  important  part  of  present  day  business.     Pledges 


200  COMMERCIAL  LAW 

of  bonds,  stocks  and  negotiable  paper  are  common  in  transactions 
with  banks.  Banks  commonly  make  loans,  taking  a  promissory 
note  secured  by  a  pledge  of  stocks,  bonds,  negotiable  instruments, 
or  other  personal  property.  Their  loans  are  commonly  called  loans 
on  collateral  or  loans  on  collateral  security. 

239.  Parties  to  a  Pledge.  A  pledge  of  chattel  property  is  a 
contract  express  or  implied.  The  party  giving  the  property  as  security 
to  his  creditors  is  called  the  pledgor,  the  party  receiving  the  property 
is  called  the  pledgee.  Like  any  contract,  it  requires  competent  par- 
ties. (See  Competency  oj  Parties,  chapter  on  Contracts.)  A  person 
mentally  insufficient,  intoxicated,  or  an  infant,  is  not  competent  to 
make  a  contract.  An  infant's  contracts  of  pledge,  like  any  of  its 
contracts  are  voidable,  but  not  void.  The  infant  may  carry  out  the 
contract  if  he  chooses.  An  infant's  contracts  are  not  illegal.  They 
cannot  be  enforced  against  an  infant,  however,  if  he  objects  by  rea- 
son of  infancy,  A  competent  party,  contracting  with  an  infant,  can- 
not void  his  contract  on  the  ground  of  infancy  of  the  other  contract- 
ing party.  Most  contracts  of  pledge  are  implied.  If  A  owes  B 
$10.00  and  gives  B  his  watch  as  security,  B  impliedly  has  the  right 
to  retain  possession  of  the  watch  until  A  pays  him  $10.00.  B  also 
has  the  right  after  A  fails  to  pay  him  the  $10.00  when  due,  to  sell  the 
watch  at  public  auction,  and  apply  as  much  of  the  proceeds  as  is  neces- 
sary to  the  payment  of  his  debt.  In  most  pledges  of  importance 
where  securities  are  pledged,  the  contract  of  pledge  is  reduced  to 
writing,  and  a  stipulation  is  made  giving  the  pledgee  the  right  to  sell 
the  property  at  public  or  private  sale  without  notice  to  the  pledgor, 
and  permitting  the  pledgee  himself  to  be  a  purchaser  at  the  sale. 
No  matter  what  the  contract  of  pledge  provides,  the  sale  should  be 
public,  notice  of  which  should  be  advertised,  and  notice  of  the  time 
and  place  should  be  given  the  pledgor. 

240.  Personal  Property  Which  May  Be  Pledged.  Any  kind 
of  personal  property  which  is  the  subject  of  transfer  may  be  pledged. 
This  includes  personal  property  having  a  tangible  existence,  as  well 
as  that  which  is  intangible.  That  is,  choses  in  action  as  well  as  choses 
in  possession  may  be  pledged.  A  promissory  note,  a  certificate  of 
stock,  or  a  bond  which  is  an  evidence  of  something  tangible  or  the 
right  to  obtain  something  tangible,  is  the  subject  of  a  pledge,  as  w^ell 
as  furniture,  jewelry  and  other  tangible  personal  property.    Property 


COMMERCIAL  LAW  201 

which  has  no  active  or  potential  existence  is  not  the  subject  of  a 
pledge.  A  person  cannot  pledge  a  horse  which  he  expects  to  purchase, 
or  a  crop  which  he  expects  to  grow  on  the  land  of  another.  A  person 
may,  however,  pledge  a  growing  crop. 

241.  The  Debt  Secured.  A  pledge  or  delivery  of  personal 
property  is  for  the  purpose  of  securing  a  debt  owing  the  pledgee. 
The  existence  of  a  debt  is  one  of  the  essential  elements  to  a  valid 
pledge.  A  delivery  of  personal  property  to  another  in  the  absence 
of  a  debt  may  constitute  a  bailment  for  the  sole  benefit  of  the  bailor, 
the  bailee,  or  for  the  mutual  benefit  of  both  parties.  To  constitute 
a  pledge,  however,  there  must  be  a  debt  owing  the  pledgee,  and  the 
property  must  be  delivered  to  him,  and  accepted  by  him  as  security 
for  the  debt.  The  debt  must  be  legal,  and  must  be  supported  by  a 
sufficient  consideration  to  support  the  contract  of  pledge. 

A  won  $50.00  at  cards  from  B.  B  gave  A  his  watch  as  security 
for  the  debt.  B  was  permitted  to  recover  possession  of  his  watch 
from  A  by  legal  action,  since  the  gambling  transaction  was  illegal. 
B  did  not  legally  owe  A  $50.00.  An  illegal  debt  cannot  support  a 
contract  of  pledge.  If,  for  any  reason,  the  debt  is  not  owing  or  is  not 
valid,  it  will  not  support  a  contract  of  pledge. 

242.  Title  to  Property  Pledged.  The  legal  title  or  ownership 
of  personal  property  pledged  remains  in  the  debtor  or  pledgor.  A 
right  of  possession  is  given  the  pledgee.  This  is  sometimes  called  a 
special  'property.  A  pledge  differs  from  a  sale  in  that,  in  a  sale,  the 
title  or  ownership  of  the  personal  property  passes  to  the  purchaser, 
while  the  possession  may  remain  in  the  seller.  In  a  pledge,  however, 
the  possession  passes  to  the  pledgee  or  creditor,  while  the  title  remains 
in  the  pledgor  or  debtor.  A  pledge  differs  from  a  chattel  mortgage 
in  that,  in  the  latter,  the  title  passes  to  the  creditor  or  mortgagee, 
subject  to  revesting  in  the  mortgagee  or  debtor,  upon  the  latter's 
paying  the  mortgage  debt. 

There  is  probably  one  exception  to  the  rule  that  title  to  property 
pledged  does  not  pass  to  the  pledgee,  and  that  is  in  case  of  negotiable 
instruments.  A  negotiable  instrument  endorsed  in  blank,  or  made 
payable  to  bearer  passes  like  currency  by  delivery.  A  pledge  of  such 
paper  passes  title  to  the  pledgee.  A  pledge  of  negotiable  paper  not 
endorsed  in  blank,  or  not  payable  to  bearer  should  be  made  by 
proper  endorsement.     In  this  event  title  passes  to  the  pledgee.     The 


202  COMMERCIAL  LAW 

title  is  revested  in  the  pledgor  by  proper  indorsement,  or  by  delivery, 
if  the  instrument  is  transferable  by  delivery,  when  the  debt  secured 
is  paid.  A  pledgee  of  negotiable  paper,  who  takes  it  before  it  is  due 
without  notice  of  defenses,  is  an  innocent  purchaser  for  value  without 
notice,  and  as  such,  is  entitled  to  the  rights  of  an  innocent  purchaser 
for  value  without  notice.  (See  Innocent  Purchaser  for  Value  With- 
out Notice,  chapter  on  Negotiable  Instruments.) 

243.  Collateral  Securities.  Loans  by  banks  are  frequently 
made  on  collateral  securities.  This  means  that  the  borrower  gives 
a  bank  a  promissory  note  for  the  amount,  and  pledges  personal 
property  to  secure  the  note.  The  contract  of  pledge  may  be  by  separate 
written  instrument,  or  it  may  be  made  a  part  of  the  note  itself.  Where 
made  a  part  of  the  note,  the  note  is  called  a  collateral  note.  (See 
Collateral  Note,  chapter  on  Negotiable  Instruments.)  Any  kind  of 
property  which  is  the  subject  of  a  pledge  may  be  used  as  collateral 
security.  Stocks,  bonds,  and  even  commercial  paper  are  commonly 
used.  Jewelry,  bills  of  lading,  and  warehouse  receipts  are  not  in- 
frequently used  in  this  kind  of  a  pledge.  Collateral  security  given 
as  security  for  a  promissory  note  or  other  negotiable  instrument  is  a 
pledge.  The  rules  governing  ordinary  pledges  govern  this  kind  of 
pledge  as  well.  The  only  practical  distinction  between  a  collateral 
loan  and  an  ordinary  loan  is  that,  in  a  collateral  loan,  the  debt  is 
evidenced  by  a  negotiable  instrument  which  is  secured  by  a  pledge 
of  personal  property. 

244.  Rights  and  Duties  of  Pledgor  and  Pledgee.  A  pledgor  has 
the  right  to  have  his  pledged  property  returned  to  him  upon  payment 
of  the  debt  secured  by  the  pledge.  He  also  has  the  right  to  have  the 
property  carefully  preserved  and  cared  for  while  in  the  possession  of 
the  pledgee.  The  pledgee  is  entitled  to  retain  possession  of  the  prop- 
erty pledged  until  the  debt  owing  him  is  paid.  He  may  re-pledge  the 
property  if  he  so  desires.  If  the  pledged  property  is  negotiable  paper, 
the  pledgee  must  collect  the  paper  as  it  falls  due,  and  observe  all  the 
requirements  necessary  to  preserve  the  rights  of  the  pledgor.  If  the 
property  pledged  is  tangible  personal  property,  the  pledgee  must 
use  the  care  of  an  ordinarily  prudent  man  in  the  preservation  and 
protection  of  it.  He  is  not  permitted  to  use  property  which  may  be 
injured  by  use, and  should  not  use  the  property  except  to  the  extent  that 
it  is  necessary  for  its  preservation.     If  the  pledgee  sells  or  transfers 


COMMERCIAL  LAW  203 

the  debt  secured,  the  purchaser  is  entitled  to  the  benefit  of  the  pledge. 
That  is,  if  A  owes  B  $500.00  and  pledges  five  shares  of  stock  to  B  as 
security  for  the  debt,  and  B  sells  the  debt  to  C,  C  is  entided  to  the 
benefits  of  the  pledged  certificates  of  stock.  If  B  gives  C  possession 
of  the  stock,  C  may  retain  the  same  until  he  receives  the  S500.00  from 
A.  If  5  does  not  turn  over  the  shares  of  stock  to  C,  C  may  bring 
an  action  to  compel  the  transfer  of  possession  to  him. 

245.  Disposal  of  Property  by  Pledgee  After  Default.  If  the 
pledgor  fails  to  pay  the  debt  secured  when  due,  the  pledgee  has  the 
right  to  enforce  his  pledge.  In  the  absence  of  any  special  agreement, 
the  law  impliedly  gives  the  pledgee  the  right  to  sell  the  property  at 
public  sale,  and  apply  as  much  of  the  proceeds  of  the  pledged  prop- 
erty as  is  necessary  to  the  payment  of  his  debt.  This  sale  must  be 
public.  The  pledgee  must  first  notify  the  pledgor  that  he  is  in  de- 
fault of  payment,  and  of  his  intention  to  sell  the  property,  giving  the 
time  and  place  of  the  proposed  sale.  The  pledgee  cannot  be  a  pur- 
chaser at  the  sale,  unless  so  permitted  by  express  stipulation  in  the 
contract  of  pledge.  INIany  contracts  of  pledge  are  in  writing,  by  the 
terms  of  which  the  pledgor  waives  notice  of  default  and  of  time  and 
place  of  sale,  and  permits  the  pledgee  to  sell  at  private  sale,  and  to 
become  a  purchaser  at  the  sale.  When  a  pledgee  is  given  the  right 
to  purchase  by  the  contract  of  pledge,  he  cannot  make  a  valid  pur- 
chase without  advertising  the  property,  and  without  exerting  himself 
reasonably  to  obtain  the  greatest  amount  possible  for  the  pledged 
property  at  the  sale. 

In  selling  pledged  property,  notice  of  default  should  be  given 
the  debtor.  He  should  also  be  notified  of  the  time  and  place  of  sale. 
The  sale  should  be  advertised  publicly,  and  should  be  public. 
The  pledgee  cannot  himself  purchase  the  property  unless  the  contract 
of  pledge  expressly  so  provides.  Even  in  this  event,  the  sale  will  not 
be  held  valid  unless  it  is  public  and  fair  in  every  way  to  the  interests 
of  the  pledgor.  A  pledgee  is  permitted  in  some  states  to  sell  accord- 
ing to  certain  statutory  methods  provided.  A  pledgee  may  sell  by 
foreclosing  his  lien  in  equity.  This  means  by  filing  a  written  request 
in  a  court  of  equity  to  sell  the  property.  In  this  event,  the  sale  is  con- 
ducted by  order  of  court. 

246.  Redemption.  A  pledgor  has  the  right  to  obtain  possession 
of  the  property  pledged,  by  paying  the  debt  secured  at  any  time  before 


2U4  COMMERCIAL  LAW 

actual  sale  of  the  property.  A  pledgor  sometimes  agrees  by  the  con- 
tract of  pledge,  to  waive  the  right  to  redeem  the  property  after  default 
of  payment  of  the  debt  secured.  Courts  will  not  enforce  such  a  pro- 
vision of  the  agreement  against  him.  The  pledgor  is  permitted  to 
redeem  the  property  by  paying  or  tendering  the  amount  of  the  debt 
at  any  time  before  sale  of  the  pledged  property.  If  the  pledgor  is  in 
default  of  payment,  however,  and  agrees  by  separate  agreement, 
made  subsequently  to  the  contract  of  pledge,  that  the  pledgee  may 
keep  the  property  pledged  in  satisfaction  of  the  debt,  he  is  bound  by 
this  agreement. 

MORTGAGES  OF  PERSONAL  PROPERTY 

247.  Mortgages  of  Personal  Property  Defined.  By  mortgage  of 
personal  property,  is  meant  the  transfer  of  title  to  personal  property  by 
a  debtor  to  a  creditor;  the  possession  of  the  property  usually  remaining 
in  the  debtor,  and  the  transfer  being  made  for  the  purpose  of  giving 
the  creditor  security  for  the  debt,  the  debtor  having  the  right  to  secure 
a  return  of  title  to  the  property  by  paying  the  debt  within  a  stipulated 
time.  It  is  a  conditional  sale.  It  is  not  absolutely  necessary  that  pos- 
session of  property  which  is  the  subject  of  a  chattel  mortgage,  remain 
in  the  debtor.  Possession  may  be  given  the  creditor  with  the  under- 
standing that  possession  and  title  are  to  revest  in  the  debtor  when  the 
latter  pays  the  debt  secured.  As  a  matter  of  business  practice,  however, 
possession  of  personal  property  which  is  the  subject  of  a  chattel  mort- 
gage, remains  in  the  debtor,  the  creditor  taking  the  title  as  security 
for  the  debt,  with  the  right  to  secure  possession  or  sell  the  property 
in  case  the  debtor  fails  to  pay  the  debt  secured  when  due.  ^\Tien 
possession  of  personal  property  is  given  a  creditor  as  security  for  a 
debt,  the  transaction  is  usually  in  the  form  of  a  pledge.  In  a  pledge, 
title  remains  in  the  debtor,  but  possession  is  given  the  creditor.  The 
distinguishing  features  of  a  sale,  bailment  or  pledge,  and  a  mortgage 
of  personal  property  are  important.  In  a  sale  of  personal  property 
title  passes  to  the  purchaser,  while  possession  usually  remains  in  the 
seller  until  the  purchase  price  is  paid.  In  a  pledge,  which  is  a  form 
of  a  bailment,  title  remains  in  the  bailor,  and  possession  only  is 
given  the  bailee  or  creditor.  In  case  of  a  chattel  mortgage,  possession 
remains  in  the  debtor,  while  title  passes  to  the  creditor  subject  to 
revesting  in  the  debtor  upon  payment  of  the  debt  secured.     The 


CO:\IMERCIAL  LAW  2U5 

debtor,  or  person  giving  the  mortgage,  is  called  the  mortgagor,  the 
creditor,  or  person  receiving  the  mortgage,  is  called  mortgagee. 

248.  What  Kinds  of  Personal  Property  Alay  Be  Mortgaged. 
The  rule  is  usually  stated  as  follows :  Any  interest  in  personal  property 
which  may  be  the  subject  of  a  present  sale  may  be  mortgaged.  Any 
tangible  personal  property  such  as  furniture,  horses,  cattle  and  cloth- 
ing, as  well  as  intangible  personal  property,  such  as  promissory  notes, 
contracts,  and  shares  of  stock  may  be  mortgaged.  It  is  not  necessary 
that  the  mortgagor  have  absolute,  unencumbered  tide  to  the  property 
to  give  a  mortgage.  An  owner  may  give  several  mortgages  on  the 
same  property.  He  may  mortgage  his  interest  as  long  as  any  remains. 
If  A  owns  a  stock  of  goods  worth  $10,000,  he  may  give  successive 
mortgages  to  different  creditors  to  whom  he  is  indebted.  He  must 
practice  no  fraud,  however.  He  must  make  each  mortgage  subject 
to  the  prior  ones,  and  must  reveal  the  facts  to  the  creditor  taking  the 
mortgage.     But  he  is  permitted  to  mortgage  his  remaining  interest. 

249.  A  Mortgage  of  Personal  Property  as  Security  for  a  Debt. 
A  mortgage  of  personal  property  is  a  contract,  and  must  be  supported 
by  a  consideration.  Mortgages  are  usually  given  to  secure  loans  of 
money.  They  may,  however,  be  given  to  secure  any  kind  of  obliga- 
tion. A  mortgage  of  personal  property  may  be  given  to  secure  ad- 
vances of  money  to  be  made  in  the  future,  as  well  as  present  or  past 
advances  or  obligations.  It  is  usually  held  that  a  past  indebtedness 
is  sufficient  consideration  to  support  a  mortgage,  as  to  all  persons, 
except  one  who  may  have  been  defrauded  out  of  the  property  mort- 
gaged. 

250.  Form  of  Mortgages  of  Personal  Property.  To  constitute 
a  transaction  a  chattel  mortgage,  there  must  be  an  agreement  by 
which  title  to  personal  property  is  transferred  to  a  creditor  upon  con- 
dition that  it  is  to  revest  in  the  debtor  upon  the  latter  paying  a  certain 
sum  of  money,  or  fulfilling  an  obligation,  within  a  certain  time. 
As  between  the  mortgagor  and  mortgagee  themselves,  an  oral  chattel 
mortgage  is  binding,  unless  within  the  provisions  of  the  Statute  of 
Frauds.  (See  Statute  of  Frauds,  chapter  on  Sales.)  Most  states 
provide  that  contracts  for  the  sale  of  personal  property  involving 
more  than  S50.00  must  be  in  writing  to  be  enforceable.  This  pro- 
vision applies  to  chattel  mortgages.  If  possession  of  the  mortgaged 
personal   property  is  given  the  mortgagee  under  an  oral  mortgage, 


20G  COIVOIERCIAL  LAW 

the  transaction  is  binding,  not  only  between  the  parties  thereto,  but 
as  to  third  persons  as  well.  Most  states  provide  by  statute  that  as 
against  third  persons  who  purchase  the  property,  or  as  against  creditors 
of  the  mortgagor,  the  chattel  mortgage  must  be  in  writing,  and  be  re- 
corded or  filed  with  a  public  official,  in  case  possession  of  the  mort- 
gaged property  is  left  with  the  mortgagor.  This  question  is  dis- 
cussed more  at  length  in  the  following  section. 

251.  Filing  and  Recording  Mortgages  of  Personal  Property. 
Most  states  have  statutes  providing  that  chattel  mortgages  must 
be  filed  or  recorded  with  a  designated  public  official  to  be  effective 
as  against  creditors,  subsequent  purchasers  or  mortgagees.  This 
requires  that  the  mortgage  be  in  writing,  and  be  deposited  or  recorded 
according  to  the  provisions  of  the  statute  with  the  designated  public 
official.  For  example,  if  A  orally  mortgages  his  horse  to  B  to  secure 
a  loan  of  $40.00,  the  mortgage  may  be  binding  between  A  and  B,  but 
if  C,  a  creditor  of  A,  secures  a  judgment  against  A  and  levies  on  the 
horse,  his  levy  is  superior  to  B's  mortgage.  If  A  sells  the  horse  to  D, 
who  has  no  notice  of  the  mortgage  to  B,  D's  rights  to  the  horse  are 
superior  to  B's.  If  A  gives  a  mortgage  in  writing  to  E,  who  records 
his  mortgage  according  to  statute,  his  rights  to  the  horse  are  superior 
to  B's.  The  statutes  of  the  different  states  require  these  mortgages 
to  be  refiled  at  stated  intervals.  Most  states  require  them  to  be  re- 
filed  each  year.  Some  require  them  to  be  refiled  only  every  three 
years. 

252.  Rights  of  Mortgagor  in  Property  Mortgaged.  A  mort- 
gage of  personal  property  ordinarily  contains  a  stipulation  that 
the  mortgagor  shall  retain  possession  until  after  default  of  payment 
of  the  mortgage  debt.  Some  states  have  statutory  provisions  giving 
the  mortgagor  the  right  of  possession  of  the  mortgaged  property  be- 
fore default  of  payment  of  the  mortgage  debt.  It  is  the  custom  at 
the  present  time  to  give  the  mortgagor  possession  of  the  property 
before  default.  If  a  mortgagor  ha\ang  possession  of  the  property 
has  it  stored  on  his  own  behalf,  and  the  warehouseman  acquires  a 
lien  on  the  goods  for  his  charges,  his  lien  is  inferior  to  the  mortgage. 
The  same  is  true  if  a  mechanic  acquires  a  lien  for  repairs  upon  the 
property. 

A  mortgagor  may  mortgage  his  interest  in  the  personal  property 
by  giving  a  second  mortgage.     The  second    mortgagee  takes    the 


COMINIERCIAL  LAW  207 

mortgagor's  right  to  have  the  property  revest  in  him  upon  payment 
of  the  debt  secured  by  the  first  mortgage.  A  mortgagor  may  sell 
his  interest  in  the  property,  subject  to  the  interest  of  the  mortgagee. 
If  the  mortgage  stipulates  that  a  mortgagor  cannot  sell  his  interest, 
this  stipulation  is  binding.  A  mortgagor  has  the  right  to  pay  the 
debt  secured,  and  by  this  means  to  have  the  title  to  the  property 
revest  in  him. 

253.  Rights  and  Liabilities  of  Mortgagee.  A  mortgagee  of 
personal  property  has  a  conditional  title  to  the  property.  If  the 
mortgagor  does  not  pay  the  debt  secured,  according  to  the  terms  of 
the  mortgage  the  mortgagee  has  the  right  to  seize  the  property  or  at 
least  to  subject  it  to  the  satisfaction  of  his  debt.  The  mortgagee 
has  the  right  to  sell  the  debt  secured  by  the  mortgage.  In  the  absence 
of  an  express  stipulation  to  the  contrary,  a  transfer  by  a  mortgagee 
of  the  debt  secured  by  the  mortgage,  transfers  the  mortgage.  An 
assignment  of  a  chattel  mortgage  apart  from  the  debt  secured,  passes 
no  interest  to  the  transferee.  A  mortgagee  has  the  right  to  seize 
the  property  upon  default  of  payment  of  the  debt  secured,  if  the 
mortgage  contains  a  stipulation  to  that  effect.  The  mortgagee  has 
the  right  to  foreclose  his  lien.  By  this  is  meant  that  he  has  the  right 
to  file  a  petition  in  a  court  of  equity  asking  that  the  property  be  sold, 
and  that  his  claim  be  paid  from  the  proceeds  first,  and  that  the  mort- 
gagor's right  to  pay  the  debt  and  secure  a  return  of  the  property  be 
cut  off.     This  is  discussed  under  the  section  on  foreclosure. 

254.  Mortgagor's  Right  of  Redemption.  In  law,  a  mortgage 
is  regarded  as  a  security  for  a  debt,  rather  than  as  a  transfer  of  prop- 
erty. By  a  chattel  mortgage,  a  transfer  of  title  to  personal  property 
is  made  by  a  debtor  to  a  creditor  as  security  for  a  debt.  The  debtor 
has  the  right,  however,  to  secure  a  return  of  the  title  to  the  property 
by  paying  the  mortgage  indebtedness  according  to  the  terms  of  the 
mortgage.  When  the  debtor  fails  to  pay  the  debt  when  it  is  due, 
absolute  title  to  the  property  vests  in  the  mortgagee  or  creditor. 
The  law,  however,  permits  the  debtor  or  mortgagor  to  pay  the  debt 
at  any  time  before  actual  sale  of  the  property  by  the  mortgagee, 
together  with  interest  and  expenses,  and  thus  secure  the  title  to  the 
mortgaged  property.  This  is  known  as  the  mortgagor's  equity  of 
redemption. 

Legal  title  is  vested  absolutely  in  the  mortgagee  upon  failure 


208  COMMERCIAL  LAW 

of  the  mortgagor  to  pay  the  mortgage  debt  when  due.  The  mort- 
gagor, however,  is  permitted  to  pay  the  debt  with  expenses  at  any 
time  before  sale  of  the  property,  and  by  this  means  to  secure  a  return 
of  the  title  to  the  property.  This  makes  a  mortgage  of  personal 
property  in  effect  a  security  for  a  debt,  rather  than  a  transfer  of  title. 
The  purpose  of  the  law  is  to  give  the  creditor  or  mortgagee  the  right 
to  secure  the  payment  of  his  debt  out  of  the  mortgaged  property,  and 
nothing  more.  Most  states  have  statutes  providing  a  method  by 
which  a  mortgagor  may  obtain  his  equity  of  redemption.  WTiere 
there  are  no  statutes,  this  right  must  be  enforced  by  a  petition  in  a 
court  of  equity. 

255.  Mortgagee's  Right  of  Foreclosure.  Equity  permits  the 
mortgagor  to  recover  the  mortgaged  property  by  filing  a  petition  in 
a  court  of  equity,  even  after  he  has  defaulted  in  paying  the  mortgage 
debt,  by  tendering  the  amount  due,  together  with  interest  and  ex- 
penses. This  right  of  the  mortgagor  may  be  cut  off  by  an  equitable 
right  enforced  on  the  part  of  the  creditor  or  mortgagee.  This  right 
is  called  the  mortgagee's  right  of  foreclosure.  \Mien  the  debtor  or 
mortgagor  is  in  default,  the  creditor  or  mortgagee  is  permitted  to  file 
a  petition  in  a  court  of  equity,  setting  forth  the  fact,  and  asking  the 
court  to  order  the  property  to  be  sold,  the  expenses  to  be  paid,  the 
mortgage  debt  to  be  satisfied,  and  the  balance  of  the  proceeds  of  the 
sale  to  be- paid  to  the  debtor  or  mortgagor.  After  this  proceeding 
has  been  resorted  to  and  completed,  the  debtor  cannot  enforce  his 
equity  of  redemption. 

The  common  method  afforded  a  mortgagee  of  foreclosing  a 
mortgagor's  equity  of  redemption  is  by  the  petition  in  equity  above 
described.  Many  of  the  states  have  provided  statutory  methods 
which  may  be  followed.  Some  mortgages  by  express  stipulation 
give  the  creditor  or  mortgagee  the  right  to  seize  the  property  and  sell 
same  upon  default  of  the  debtor  to  pay.  This  takes  the  place  of 
an  equitable  foreclosure.  When  a  mortgage  contains  a  power  of  sale 
stipulation,  the  mortgagee  may  seize  the  property  when  the  mortgagor 
defaults,  and  sell  the  same  at  public  sale.  The  excess  recovered 
over  the  mortgage  debt  and  expenses,  must  be  paid  the  mortgagor. 
If  possession  of  the  property  cannot  be  obtained  peaceably,  the 
mortgagee  must  bring  an  action  in  replevin,  by  which  possession  is 
obtained  by  an  officer  of  the  court.     In  some  jurisdictions,  a  mort- 


COMjSIERCIAL  law  209 

gagee  is  permitted  to  seize  and  sell  mortgaged  property  upon  default 
of  the  debtor,  even  though  the  mortgage  contains  no  power  of  sale 
stipulation.  The  sale  must  be  bona  fide  and  public,  or  it  can  beset 
aside  at  the  instance  of  the  defrauded  mortgagor. 

CARRIERS 

256.  Carriers  Defined.  Carrier  is  the  term  applied  to  individuals 
or  companies  engaged  generally  or  specially  in  carrying  goods  or 
passengers  from  place  to  place.  The  business  of  carriers  has  grown 
rapidly  with  the  development  of  this  country.  The  business  of  steam- 
boat, railway,  express,  and  electric  package  companies  forms  an  impor- 
tant part  of  present  day  affairs.  Carriers  are  usually  classified  as  co7?i?no?i 
or  private.  Both  common  and  private  carriers  may  carry  either  passen- 
gers or  goods.  Carriersof  passengersare  discussed  inaseparatechapter. 

257.  Common  Carriers  of  Goods.  A  common  carrier  of  goods 
is  one  who  represents  himself  as  engaged  in  the  business  of  carrying 
goods  from  place  to  place  for  anyone  who  desires  to  employ  him. 
A  common  carrier  of  goods  is  liable  as  an  insurer  of  the  goods.  By 
reason  of  this  exceptional  liability  attaching  to  a  common  carrier,  it  is 
important  to  know  who  are  common  carriers.  Everyone  who  carries 
goods  from  place  to  place  is  not  a  common  carrier.  To  constitute  a 
person  a  common  carrier,  there  must  be  a  representation  on  his  part 
of  a  willingness  to  carry  goods  belonging  to  anyone  who  desires  to 
employ  him  for  that  purpose.  A  common  carrier  need  not  neces- 
sarily hold  himself  out  as  willing  to  carry  all  classes  of  goods.  He 
may  limit  his  business  to  carrying  a  peculiar  class  of  goods,  and  still 
be  a  common  carrier.  It  may  be  stated  as  a  rule  that  anyone  who 
holds  himself  out  as  willing  to  carry  goods  of  any  person  is  a  common 
carrier.  Common  examples  of  common  carriers  are  railroad  com- 
panies, express  companies,  public  transfer  companies,  and  electric 
package  companies.  An  express  company,  in  holding  itself  out  as 
willing  to  carry  goods  of  any  person,  is  a  common  carrier. 

If  persons  carry  goods  only  on  special  contract,  and  choose  their 
customers,  they  are  private  carriers,  and  are  not  liable  as  insurers  of 
the  goods  entrusted  to  their  care.  Anyone  may  engage  in  the  busi- 
ness of  a  private  carrier,  and  so  long  as  he  does  not  hold  himself  out 
as  a  common  carrier,  ho  cannot  be  compelled  to  accept  for  carriage 
goods  against  his  will,  neither  is  he  liable  as  an  insurer  of  the  goods. 


210  COMMERCIAL  LAW 

A  private  carrier  is  an  ordinary  bailee.  If  he  agrees  to  carry  for 
compensation,  he  must  exercise  ordinary  care,  and  is  liable  for  ordi- 
nary negligence.  The  business  of  a  common  carrier  is  said  to  be  one 
of  the  exceptional  mutual  benefit  bailments.  The  exceptional  lia- 
bility of  a  common  carrier  is  discussed  under  a  separate  section. 

258.  Implied  Liability  of  a  Common  Carrier.  In  early  days 
when  pirates  infested  the  seas  and  stagecoach  robberies  were  com- 
mon, it  was  an  easy  matter  for  a  common  carrier  to  conspire  with 
robbers  and  thieves,  in  unjustly  depriving  the  owner  of  the  goods 
entrusted  to  the  carrier's  care.  By  reason  of  the  opportunity  given  a 
common  carrier  fraudulently  to  deprive  a  shipper  of  his  goods,  the 
law  at  an  early  time  placed  the  exceptional  liability  of  an  insurer  upon 
a  common  carrier.  The  relation  between  a  shipper  and  a  carrier, 
after  goods  are  placed  in  the  hands  of  the  carrier,  is  one  of  mutual 
benefit  bailment.  The  liability  of  a  common  carrier,  however,  is 
not  limited  to  the  liability  of  an  ordinary  mutual  benefit  bailee. 
Common  carriers  and  inn-keepers  are  said  to  be  exceptional  mutual 
benefit  bailees.  This  exceptional  liability  is  placed  on  them  by  reason 
of  the  opportunity  given  them  fraudulently  to  deprive  the  owners  of 
their  goods,  and  to  compel  the  carriers  to  protect  the  goods  against 
robbery  and  theft. 

A  common  carrier  is  liable  as  an  insurer  of  the  goods  entrusted 
to  his  care.  He  cannot  avoid  liability  by  acting  as  an  ordinarily 
prudent  man  would  act  under  the  circumstances  in  protecting  and 
caring  for  the  goods,  but  he  must  actually  protect  them  or  be  liable 
to  the  owner  for  their  loss  or  damage.  There  are  a  few  exceptions 
discussed  under  a  separate  section.  If  A  employs  B  to  keep,  feed, 
and  care  for  his  horse  for  six  months,  for  fifty  dollars,  and  B  puts  the 
horse  in  his  stable,  where  it  is  stolen,  together  with  B's  own  horse, 
B  is  not  liable  to  A  for  the  loss  of  the  horse,  if  he  acted  as  an  ordinarily 
prudent  man  would  act  under  the  same  conditions.  If,  however, 
A  delivers  his  horse  to  B,  a,  railroad  company,  to  be  shipped  from 
Buffalo  to  Chicago,  and  the  horse  is  stolen  from  B's  possession,  B 
must  pay  A  the  value  of  the  horse.  He  is  not  permitted  to  say  that 
he  exercised  ordinary  care  in  the  protection  of  the  horse.  This  is 
what  is  meant  by  the  exceptional  liability  of  a  common  carrier.  While 
the  reason  for  this  exceptional  liability  of  a  common  carrier  has  largely 
passed  away  by  the  practical  extermination  of  highway  robbers  and 


COMMERCIAL  LAW  211 

pirates,  the  exceptional  liability  of  common  carriers  remains  as  a  part 
of  the  law.  This  exceptional  liability  is  not  a  matter  of  express  con- 
tract between  the  shipper  and  the  carrier,  but  is  impliedly  a  part  of 
the  contract. 

259.  Exceptions  to  the  Liability  of  a  Common  Carrier  as  an 
Insurer.  A  common  carrier  of  goods  is  not  absolutely  liable  as  an 
insurer  of  the  goods  entrusted  to  his  care.  If  the  goods  are  lost,  in- 
jured, or  destroyed  by  an  Act  of  God,  by  a  public  enemy,  by  negli- 
gence of  the  shipper,  by  the  inherent  nature  of  the  goods,  or  by  the 
exercise  of  public  authority,  the  carrier  is  not  liable  as  an  insurer. 

By  Act  of  God  is  meant  an  inevitable  act  arising  without  the  in- 
tervention or  aid  of  a  human  agency.  A  loss  of  goods  by  a  storm, 
by  lightning,  or  by  earthquake  is  an  example.  If  the  goods  are  lost 
or  injured  as  a  result  of  any  act  of  the  shipper,  the  carrier  is  not  liable 
as  an  insurer.  A  carrier  is  permitted  to  adopt  and  enforce  reasonable 
regulations  relating  to  the  packing  and  shipment  of  goods.  If  the 
shipper  negligently  packs  goods  so  that  they  are  injured  by  reason 
thereof,  the  carrier  is  not  liable  as  an  insurer.  If  the  shipper  im- 
properly addresses  packages,  and  they  are  lost  by  reason  thereof, 
the  carrier  is  not  liable  as  an  insurer.  If  the  shipper  accompanies 
live  stock,  and  injury  occurs  by  reason  of  the  carelessness  of  the 
shipper,  the  carrier  is  not  liable  as  an  insurer. 

By  public  enemy  is  meant  a  power  at  war  with  a  nation.  This 
includes  pirates.  Mere  insurrections,  robberies,  thefts,  mobs,  and 
strikes  are  not  included  in  this  class  of  public  enemies.  If  a  loss  of 
goods  occurs  by  means  of  public  enemy,  a  carrier  is  not  liable  as  an 
insurer  of  the  goods.  If  the  loss  occurs  through  the  inherent  nature 
of  the  goods,  without  the  negligence  of  the  carrier,  the  latter  is  not 
liable  as  an  insurer.  For  example,  if  fruit  spoils  as  a  result  of  warm 
or  cold  weather,  if  the  carrier  is  not  in  any  way  at  fault,  he  is  not 
liable  as  an  insurer,  since  the  loss  occurs  on  account  of  inherent  de- 
fects of  the  goods.  If  animals  injure  themselves  while  in  the  carrier's 
possession  by  reason  of  their  viciousness,  or  fright,  which  injury 
could  not  have  been  prevented  by  reasonable  care  on  the  part  of  the 
carrier,  the  latter  is  not  responsible. 

If  the  goods  are  lost  or  injured  by  reason  of  the  exercise  of  public 
authority,  the  carrier  is  not  liable  as  an  insurer.  If  the  goods,  while 
in  the  possession  of  the  carrier  are  seized  upon  attachment,  or  by 


212  COMMERCIAL  LAW 

levy  on  execution  by  the  creditors  of  the  shipper,  the  carrier  is  not 
liable  if  he  promptly  notifies  the  shipper. 

260.  Limiting  Common  Law  Liability  by  Special  Contract.  The 
common  law  liability  of  a  common  carrier  of  goods  is  that  of  an  insurer. 
It  matters  not  how  the  loss  or  injury  occurs,  whether  without,  or 
through  the  carelessness  of  the  carrier,  the  latter  is  liable  for  the  loss, 
if  it  does  not  come  within  the  recognized  exceptions.  Carriers  com- 
monly endeavor  to  limit  their  exceptional  liability  by  making  a  special 
contract  with  a  shipper,  by  the  terms  of  which  the  carrier  limits  his 
exceptional  liability  in  case  of  loss. 

There  is  considerable  conflict  of  authorities  between  the  diflferent 
states 'as  to  whether  a  carrier  may  limit  his  exceptional  liability  at  all 
by  special  contract.  Where  permitted  to  limit  this  liability,  there  is 
considerable  controversy  as  to  the  extent  to  which  a  carrier  may 
limit  his  liability  by  special  contract.  The  courts  of  most  juris- 
dictions agree  that  a  common  carrier  cannot  limit  his  exceptional 
liability  by  special  contract  as  to  his  own  negligence  or  the  negligence 
of  his  servants.  This  special  contract  by  which  a  common  carrier 
limits  his  exceptional  liability  as  an  insurer  is  usually  in  the  form  of 
a  written  contract  signed  by  the  shipper  or  in  the  form  of  stipulations 
in  the  bill  of  lading  given  to  the  shipper  and  called  to  his  attention. 

If  a  carrier  accepts  a  carload  of  hay  for  shipment,  without 
limiting  his  common  law  liability  by  special  contract,  and  the  hay  is 
destroyed  by  fire,  the  carrier  must  respond  in  damages  for  the  loss, 
regardless  of  his  negligence.  If,  however,  the  carrier  enters  into  a 
special  contract  with  the  shipper  to  the  effect  that  the  carrier  shall 
not  be  liable  for  loss  by  fire,  and  the  hay  is  destroyed  by  fire  without 
negligence  of  the  carrier  or  his  agents  or  servants,  the  carrier  is  not 
liable  in  damages. 

26L  Limiting  Common  Law  Liability  by  an  Agreed  Valuation. 
Common  carriers  frequently  attempt  to  limit  their  liability  for  loss 
or  injury  to  goods  by  stipulations  in  a  bill  of  lading,  that  in  case  of 
loss,  the  valuation  shall  not  exceed  SSO.OO,  or  some  specified  amount. 
If  the  shipper  does  not  notify  the  carrier  that  the  valuation  is  a  greater 
amount,  the  amount  mentioned  in  the  bill  of  lading  is  the  valuation 
fixed  by  special  contract.  In  case  of  loss  there  is  a  great  variety  of 
holdings  as  to  whether  a  carrier  may  limit  his  liabilities  to  the  amount 
mentioned  in  the  contract.     Probably  the  courts  in  the  majority  of 


COMIMERCIAL  LAW  213 

cases  hold  that  such  a  stipulation  is  valid  in  case  of  losses  arising 
not  by  reason  of  the  negligence  of  the  carrier  or  his  agents.  The 
courts  of  a  few  jurisdictions  hold  that  the  stipulation  as  to  valuation 
is  good  even  as  against  the  negligence  of  the  carrier  or  his  agent. 

So  far  as  interstate  shipments  are  concerned,  the  question  is 
settled  by  the  Federal  Interstate  Commerce  Act  of  1906.  This  act 
provides  that  as  to  shipments  from  one  state  to  another,  such  a  stipula- 
tion is  not  valid.  The  language  of  the  Interstate  Commerce  Act 
relative  to  this  question  is  as  follows: 

A  common  carrier  receiving  property  for  interstate  transporation  shall 
issue  a  receipt  or  bill  of  lading  therefor,  and  be  liable  to  the  holder  for  any  loss, 
damage  or  injury  to  the  property,  and  no  contract,  receipt,  etc.,  shall  exempt 
the  carrier  from  the  liability  thereby  imposed. 

At  present,  so  far  as  interstate  shipments  are  concerned,  a 
common  carrier  cannot  limit  his  common  law  liability  by  a  special 
contract. 

262.  Bills  of  Lading  and  Shipping  Receipts.  Bill  of  lading,  or 
shipping  receipt  is  the  term  applied  to  the  receipt  given  a  shipper  by 
a  carrier,  when  goods  are  delivered  into  the  latter's  possession.  A 
bill  of  lading  serves  two  purposes.  It  is  a  receipt  of  the  shipper  from 
the  carrier  for  the  goods  delivered  to  the  latter,  and  it  is  a  contract 
representing  the  agreement  between  the  shipper  and  the  carrier.  It 
is  usually  held  that  the  terms  printed  on  the  bill  of  lading  are  binding 
on  the  shipper,  even  though  the  bill  is  not  signed  by  him.  A  bill  of 
lading  represents  the  title  to  the  goods.  It  may  be  transferred  like  a 
negotiable  instrument.  A  purchaser  takes  the  position  of  the  shipper. 
A  bill  of  lading  is  negotiable  in  the  sense  that  it  represents  title  or 
ownership  of  the  goods,  and  in  the  sense  that  a  purchaser  takes  the 
right  of  the  shipper  in  the  goods.  But  it  is  not  negotiable  in  the  sense 
that  a  purchaser  takes  a  better  position  than  the  original  holder  had. 

263.  Title  to  Goods  After  Delivery  to  Common  Carrier.  In  the 
absence  of  special  agreement  to  the  contrary,  where  a  party  in  one 
town  purchases  goods  from  a  party  in  another,  the  goods  to  be  de- 
livered by  common  carrier,  title  to  the  goods  passes  to  the  purchaser 
when  the  goods  are  delivered  to  the  carrier  properly  packed  and 
addressed.  This  kind  of  a  sale  is  commonly  called  a,  sale  F.  0.  B. 
place  of  purchase,  "F.  O.  B."  means  "free  on  board."  Careful 
business  people,  in  making  sales  or  purchases,  specify  whether  the 


214  COMMERCIAL  LAW 

goods  are  to  be  F.  O.  B.  place  of  shipment,  or  F.  O.  B.  place  of  de- 
livery. If  the  sale  is  F.  O.  B.  place  of  delivery,  title  does  not  pass  to 
the  purchaser  until  the  goods  are  delivered  at  the  place  specified. 
If  the  goods  are  lost  by  the  carrier,  the  loss  falls  on  the  shipper  or 
carrier,  and  not  on  the  purchaser.  If  goods  are  shipped  F.  O.  B. 
place  of  shipment,  or  if  no  agreement  is  made  about  shipment  or  pay- 
ment of  freight,  tide  passes  to  the  purchaser  when  the  goods  are 
properly  delivered  to  the  carrier.  If  the  goods  are  lost,  the  loss  falls 
on  the  carrier  or  purchaser,  and  not  on  the  seller.  Where  no  stipula- 
tion is  made  relative  to  payment  of  freight  or  carrier's  charges,  the 
law  presumes  that  the  purchaser  is  to  pay  the  carrier's  charges. 
Sales  are  sometimes  made  in  which  it  is  specified  that  the  freight 
charges  are  to  be  allowed.  This  means  that  the  shipper  is  to  pay 
the  carrier  the  freight  charges.  If  the  goods  are  lost,  the  loss  falls 
on  the  purchaser.  If  there  is  an  express  stipulation  that  the 
goods  are  to  be  delivered  at  the  place  of  delivery  by  the  seller, 
this  means  that  title  does  not  pass  to  the  buyer  until  the  delivery 
is  made  at  that  place,  and  the  shipper  or  seller  stands  the  risk  of 
loss  in  transit. 

264.  Duty  of  Common  Carrier  to  Accept  Goods  for  Carriage. 
A  common  carrier  of  goods  holds  himself  out  to  the  public  as  ready 
to  carry  the  goods  of  anyone  who  desires  to  employ  him.  The 
carrier  may  demand  payment  of  reasonable  charges  in  advance. 
He  may  also  enforce  reasonable  regulations  relating  to  the  packing, 
delivery,  and  addressing  of  goods.  Carriers  are  not  obliged  to  carry 
goods  other  than  the  kinds  they  purport  to  carry.  For  example,  an 
express  company  representing  itself  to  the  public  as  a  carrier  of  light 
packages  cannot  be  forced  to  accept  heavy  machinery  for  carriage. 
A  carrier  cannot  be  compelled  to  accept  goods  not  belonging  to  the 
class  it  represents  itself  as  being  in  the  business  of  carrying.  But  a 
carrier  must  accept  for  carriage  goods  of  the  class  it  purports  to 
carry,  no  matter  by  whom  tendered.  If  the  bill  of  lading  offered 
by  the  carrier  contains  stipulations  not  agreeable  to  the  shipper,  the 
latter  may  demand  the  carrier  to  carry  the  goods  under  the  terms  of 
the  implied  common  law  liability  of  a  carrier.  The  carrier  is  ex- 
cused from  accepting  goods  in  the  event  of  a  great  and  unexpected 
bulk  of  business.  He  must,  however,  furnish  sufficient  equipment 
to  meet  the  general  requirements  of  business. 


COMMERCIAL  LAW  215 

265.  Stoppage  in  Transitu.  WTiere  goods  sold  on  credit  have 
been  delivered  to  a  carrier,  if  the  vendor  learns  that  the  pur- 
chaser is  insolvent,  he  may  order  the  carrier  to  withhold  delivery  of 
the  goods.  This  is  called  stoppage  in  transitu.  This  question  is 
also  discussed  in  the  chapter  on  sales.  The  vendor  may  compel 
the  carrier  to  withhold  delivery  of  goods  by  giving  him  written  or 
oral  notice  to  that  effect.  To  be  effective,  this  notice  must  be  given 
before  the  carrier  has  surrendered  possession  of  the  goods  to  the  pur- 
chaser. If  the  carrier  delivers  the  goods  to  the  purchaser  after 
receiving  notice  from  the  seller  to  withhold  shipment,  he  is  liable  in 
damages  to  the  seller.  If  the  purchaser  has  received  possession  of 
the  bill  of  lading,  and  has  sold  it  to  a  bona  fide  purchaser,  as  to  the 
latter,  the  seller  cannot  exercise  the  right  of  stoppage  in  transitu. 
If  the  carrier  is  in  doubt  about  who  is  entitled  to  possession  of  the 
goods,  he  may  file  a  petition  with  a  court,  called  an  interpleader, 
asking  the  court  to  determine  who  is  entitled  to  possession  of  the 
goods. 

266.  Delivery  of  Goods  by  a  Carrier.  The  manner  of  delivery 
of  goods  required  of  a  common  carrier,  depends  largely  upon  usage 
and  custom.  In  large  cities,  express  companies  and  carriers  of 
small  packages  usually  make  deliveries  to  residences  and  places  of 
business.  In  small  towns,  and  in  the  country  they  usually  deliver 
at  their  depots  or  store  rooms  only.  Persons  dealing  with  common 
carriers  are  bound  by  their  customs,  and  by  reasonable  regulations 
of  the  carriers.  Carriers  by  water  and  rail  ordinarily  deliver  at  their 
depots  and  warehouses  only.  The  purchaser  is  obliged  to  call  for 
his  goods.  The  carrier  is  obliged  to  give  the  purchaser  notice  that 
the  goods  have  arrived.  If  the  purchaser  fails  to  call  within  a  rea- 
sonable time  thereafter,  the  exceptional  liability  of  a  common  carrier 
ceases,  and  the  liability  of  a  warehouseman  attaches.  A  warehouse- 
man is  obliged  to  exercise  only  ordinary  care  in  the  protection  of  the 
goods,  while  a  carrier  is  an  insurer  of  the  goods. 

If  a  carrier  delivers  goods  to  the  wTong  person,  he  is  liable  in 
damages  to  the  owner.  If  the  consignee  refuses  to  accept  the  goods, 
the  carrier  should  notify  the  shipper  of  this  fact.  The  carrier's 
liability  then  becomes  that  of  a  warehouseman. 

Goods  are  frequently  delivered  to  a  carrier  C.  0.  D.  (collect  on 
delivery).     A  carrier,  in  this  event,  is  required  to  collect  a  specified 


21G  COMMERCIAL  LAW 

amount  from  the  purchaser  before  delivery.  The  purchaser  is  en- 
titled to  inspect  the  goods.  Title  to  goods  sent  C.  O.  D.,  is  in  the 
purchaser,  the  possession  only  being  reserved  by  the  owner  for  the 
purpose  of  collecting  certain  charges,  ordinarily  the  purchase  price. 

267.  Charges  and  Lien  of  Common  Carrier.  A  common  carrier 
usually  stipulates  by  special  contract  with  a  shipper  the  amount  of 
charges  for  carriage.  In  the  absence  of  special  contract,  the  carrier 
is  entitled  to  a  reasonable  amount  for  this  service.  The  United 
States  Congress  has  the  right  to  regulate  charges  for  interstate  car- 
riage. The  states  may,  through  their  legislatures,  regulate  the  rates 
within  their  respective  jurisdictions.  A  carrier  has  a  lien  on  the 
goods  carried  for  his  charges,  and  may  retain  possession  of  the  goods 
until  these  charges  are  paid. 

268.  Discrimination  by  Common  Carrier.  A  common  carrier 
represents  himself  as  willing  to  carry  the  goods  of  anyone  who  desires 
to  employ  him.  Business  depends  to  a  large  degree  upon  the  facilities 
offered  by  carriers,  notably  by  railroads.  If  certain  business  men 
or  interests  are  favored  by  carriers,  competition  in  the  same  line  is 
eventually  destroyed.  For  this  reason,  the  law  prohibited  discrimina- 
tion on  the  part  of  a  common  carrier.  All  persons  shipping  under 
the  same  conditions  must  be  treated  alike.  The  policy  of  the  law  is 
to  promote  competition.  There  are  cases  which  hold  that  a  carrier 
is  permitted  to  charge  one  person  a  less  rate  than  another,  if  the  latter 
is  not  charged  an  unreasonable  rate.  But  this  rule  does  not  apply 
where  the  parties  are  competitors  and  where  the  difference  in  rate 
charged  is  for  the  purpose  of  destroying  competition.  The  matter 
of  discrimination  is  now  regulated  largely  by  interstate  commerce 
legislation  discussed  under  a  separate  section. 

269.  Carriers  of  Mail.  The  Constitution  of  the  United  States 
gives  Congress  the  powder  to  establish  postofflces  and  post  roads. 
Under  this  provision,  the  postoffice  department  has  been  created. 
It  is  a  department  of  the  government.  While  the  postoffice  depart- 
ment carries  mail  for  compensation,  it  is  a  department  of  the  govern- 
ment and  not  a  common  carrier.  The  government  cannot  be  sued 
without  giving  its  consent.  It  is  an  elementary  principle  that  a  gov- 
ernment or  sovereign  power  cannot  be  sued  by  its  citizens.  If  the 
mail  is  lost,  the  government  cannot  be  sued  for  damages.  The 
government  employs  postal   clerks,   postmasters   and   mail-carriers 


COMMERCIAL  LAW  217 

to  operate  the  postal  system.  These  agents  or  servants  of  the  govern- 
ment are  required  to  give  bond  to  the  government.  If  they  violate 
their  contract,  or  neglect  their  duties,  the  government  may  collect 
its  losses  on  these  bonds.  A  person  whose  mail  is  lost  cannot  sue 
a  postoffice  agent  on  his  bond.  If,  however,  a  person  whose  mail  is 
lost  can  trace  the  loss  to  the  carelessness  of  a  particular  postmaster 
or  mail-carrier,  he  may  sue  such  postmaster  or  carrier  for  damages 
sustained. 

270.  Interstate  Commerce  Act.  The  United  States  Consti- 
tution gives  Congress  the  power  to  regulate  interstate  commerce. 
The  United  States  Congress  enacted  interstate  commerce  regula- 
tions in  1887,  1889,  1891,  1895  and  in  1906.  The  present  United 
States  interstate  commerce  regulation  is  commonly  known  as  the 
Interstate  Commerce  Act  oj  1906.  This  act  provides  for  an  inter- 
state commerce  commission,  consisting  of  seven  members.  Each 
member  receives  a  salary  of  $10,000  a  year.  The  act  compels  car- 
riers engaged  in  interstate  or  foreign  commerce  to  publish  a  schedule 
of  charges  for  carrying  property.  Carriers  who  give  rebates  or  offset, 
or  discriminate  between  shippers  in  any  way,  are  subject  to  heavy 
fines,  and  the  oflficers  and  agents  are  subject  to  imprisonment.  The 
commission  is  authorized  to  investigate  the  profits  and  charges  of 
carriers,  and  to  fix  the  maximum  and  minimum  rates  for  carriage  as 
well  as  the  proportion  of  through  rates  to  which  each  of  several  carriers 
is  entitled.  Persons  discriminated  against  may  make  complaints 
to  the  commission.  The  commission  may  investigate  these  com- 
plaints as  a  court  by  summoning  witnesses,  and  by  taking  testimony. 
The  commission  may  award  damages  to  the  party  injured.  If  the 
carrier  refuses  to  comply  with  the  orders  of  the  commission,  the  latter 
may  invoke  the  machinery  of  the  United  States  courts  to  enforce 
its  order.  Wlien  matters  are  removed  to  a  L^nited  States  court,  the 
finding  of  the  commission  makes  out  a  prima  facie  case. 

Section  20  of  the  act  prevents  carriers  doing  interstate  or 
foreign  commerce  business  from  relieving  themselves  from  liability 
by  special  provision  in  the  bills  of  lading.  This  is  a  very  salutary 
act,  since  it  was  the  common  custom  of  carriers  to  place  many  pro- 
visions in  their  bills  of  lading  by  which  they  endeavored  to  evade 
their  liability  as  common  carriers.  It  was  practically  impossible 
for  a  shipper  to  comprehend  all  the  printed  stipulations  contained  in 


218  COMMERCIAL  LAW 

a  bill  of  lading.  This  provision  of  the  act  compelling  a  common 
carrier  doing  an  interstate  or  foreign  commerce  business  to  issue  a 
bill  of  lading  by  which  he  is  liable,  in  case  of  loss,  for  the  real  value 
of  the  goods  lost,  is  as  follows: 

"Any  common  carrier,  railroad  or  transportation  company  receiving  goods 
for  transportation  from  a  point  in  one  state  to  a  point  in  anotlier  shall  issue  a 
receipt  or  bill  of  lading  therefor,  and  shall  be  liable  to  the  lawful  holder  thereof 
for  any  loss,  damage  or  injury  to  such  property  caused  by  it,  or  by  any  com- 
mon carrier,  railroad  or  transportation  company  to  which  such  property  may 
be  delivered,  or  over  whose  lines  such  property  may  pass,  and  no  contract, 
receipt,  rule  or  regulation  shall  exempt  such  common  carrier,  railroad  or 
transportation  company  from  the  liability  hereby  imposed;  provided,  that 
nothing  in  this  section  shall  deprive  any  holder  of  such  receipt  or  bill  of  lading 
of  any  remedy  or  right  of  action  which  he  has  under  existing  law." 

The  act  also  provides  that  every  person  or  corporation,  whether 
carrier  or  shipper,  who  shall  knowingly  grant,  give,  solicit,  accept  or 
receive  any  such  rebates,  concession  or  discrimination  shall  be  deemed 
guilty  of  a  misdemeanor,  and  on  conviction  thereof  shall  be  punished 
by  a  fine  of  not  less  than  one  thousand  dollars  ($1,000.00),  nor  more 
than  twenty  thousand  dollars  ($20,000.00). 

The  act  also  provides  that  the  willful  failure,  upon  the  part  of 
any  carrier,  to  file  and  publish  the  tariff  or  rate  and  charges  required 
by  said  act,  or  the  failure  strictly  to  observe  such  tariffs  until  changed 
according  to  law,  shall  be  a  misdemeanor,  and  upon  conviction 
thereof,  the  corporation  offending  shall  be  subject  to  a  fine  of  not 
less  than  $1,000.00  for  each  offense,  nor  more  than  $20,000.00  for  each 
offense. 

The  act  also  provides  that  agents  or  officers  of  a  corporation 
convicted  of  violating  the  act  may  be  imprisoned  not  more  than  two 
years  in  addition  to  the  fine.  A  person  delivering  property  to  a  car- 
rier for  transportation  to  another  state  or  to  a  foreign  country  who 
shall  accept  a  rebate  or  offset  from  the  regular  scheduled  charge  shall, 
in  addition  to  the  above  described  penalties,  forfeit  to  the  LTnited 
States  a  sum  of  money  three  times  the  amount  received  from  the 
carrier. 

CARRIERS  OF  PASSENGERS 

271.  Carriers  of  Passengers  Defined.  One  who  holds  himself 
out  as  ready  and  willing  to  carry  from  place  to  place  for  compensa- 
tion, all  Yvho  desire  to  employ  him  for  this  purpose  is  a  public  carrier 


COMMERCIAL  LAW  219 

of  passengers.  The  liability  of  a  public  carrier  of  passengers  is  not 
the  same  as  that  of  a  common  carrier  of  goods.  A  common  carrier 
of  goods  is  liable  as  an  insurer  of  the  goods,  while  a  common  carrier 
of  passengers  is  obliged  to  exercise  a  high  or  extraordinary  degree  of 
care,  only  in  the  protection  of  passengers.  Railroad,  steamboat, 
ferry  and  omnibus  companies  are  common  examples  of  public  car- 
riers of  passengers.  Owners  of  buildings  operating  elevators  are 
in  the  position  of  public  carriers  of  passengers.  While,  strictly,  they 
are  not  obliged  to  carry  all  persons,  they  operate  the  elevator  publicly 
for  the  convenience  of  their  tenants,  and  their  tenants'  clients.  The 
liability  for  injury  to  passengers  of  owners  of  buildings  in  which  eleva- 
tors are  operated  is  the  same  as  that  of  public  carriers  of  passengers. 

272.  Who  Are  Passengers?  A  person  does  not  have  to  be  on 
board  a  public  conveyance  to  be  a  passenger.  Steamboat  companies 
provide  depots,  waiting  rooms,  and  wharves  for  the  convenience  of 
passengers.  Railroad  companies  provide  depots,  rest  rooms,  and 
waiting  rooms  for  persons  desiring  to  make  use  of  the  railroad.  It 
is  said  to  be  the  rule,  that  when  a  person  enters  the  premises  of  a  public 
carrier  for  the  purpose  of  becoming  a  passenger,  he  is  a  passenger  from 
the  time  he  enters  upon  the  property  of  the  public  carrier.  If  a  per- 
son enters  the  premises  of  a  public  carrier  not  for  the  purpose  of  pur- 
chasing a  ticket,  nor  to  become  a  passenger,  he  is  a  mere  trespasser, 
and  is  not  entitled  to  the  rights  and  privileges  of  a  passenger.  A 
person  traveling  on  a  pass  is  a  passenger.  A  carrier  of  passengers 
is  permitted  to  enforce  reasonable  regulations  for  acceptance  of  pas- 
sengers. Until  these  reasonable  rules  are  observed  a  person  is  not 
a  passenger.  A  person  is  a  passenger  until  he  has  a  reasonable  time 
to  leave  the  public  conveyance  and  premises  of  the  carrier  after  reach- 
ing his  journey's  end. 

273.  Rights  and  Liabilities  of  Carriers  of  Passengers.  A  public 
carrier  of  passengers  is  obliged  to  carry  all  suitable  persons  who  de- 
sire to  become  passengers,  so  far  as  the  carrier  has  facilities  for  their 
accommodation.  The  carrier  is  also  obliged  to  furnish  reasonable 
facilities  to  accommodate  all  who  may  reasonably  be  expected  to 
present  themselves  as  passengers.  A  carrier  may  refuse  to  carry 
drunken  or  disorderly  persons,  as  well  as  those  who,  by  reason  of 
contagious  diseases  or  for  other  reasons,  are  not  proper  passengers. 
A  carrier  may  require  passengers  to  purchase  tickets  before  admitting 


220  COMMERCIAL  LAW 

them  to  the  vehicle  of  conveyance.  The  carrier  is  permitted  to  pass 
reasonable  rules  and  regulations  for  conducting  his  business.  Un- 
like a  carrier  of  goods,  a  carrier  of  passengers  is  not  liable  as  an 
insurer.  A  carrier  of  passengers  is  bound  to  exercise  extraordinary 
care  in  the  protection  of  the  passengers,  and  is  liable  for  any  negligence 
resulting  in  a  passenger's  injury,  and  which  is  not  contributed  to  by 
the  passenger. 

If  a  passenger  refuses  to  pay  his  fare,  or  becomes  disorderly,  he 
may  be  removed  by  the  carrier.  The  carrier  is  entitled  to  use  only 
the  force  necessary  to  eiTect  the  removal  of  the  passenger.  If  the 
passenger  is  injured  by  reason  of  excessive  force  used  by  the  carrier 
in  his  removal,  the  carrier  is  liable  in  damages.  Some  states  require 
by  statute  that  carriers  remove  obnoxious  passengers  only  at  regular 
stations.  In  the  absence  of  such  statutes,  a  carrier  may  remove  a 
passenger  at  any  place  where  he  may  be  removed  without  injury. 
If  a  passenger  is  injured  by  reason  of  his  own  negligence,  or  if  his 
own  negligence  in  any  way  contributed  directly  to  the  injury,  he 
cannot  recover  damages  from  the  carrier. 

274.  Baggage.  A  public  carrier  of  passengers  may  pass  rea- 
sonable rules  and  regulations  governing  the  control  and  amount  of 
personal  baggage  a  passenger  is  permitted  to  carry  with  him.  The 
contract  between  a  passenger  and  an  ordinary  public  carrier  impliedly 
gives  the  passenger  the  right  to  carry  with  him  on  his  journey,  baggage 
consisting  of  articles  to  be  used  on  his  journey.  The  business  of 
the  passenger,  his  social  position,  and  the  purpose  of  the  journey 
largely  determine  the  question  of  what  articles  properly  constitute 
personal  baggage.  A  workingman  would  not  be  permitted  to  claim 
that  jewels  and  fancy  dresses  were  a  part  of  his  personal  baggage 
Such  articles  would  properly  constitute  the  personal  baggage  of  an 
actress  or  a  society  woman. 

If  the  personal  baggage  is  placed  in  trunks  and  packages,  and 
placed  in  the  absolute  control  of  the  carrier,  the  latter  is  liable  for 
their  protection  as  an  insurer.  If  the  articles  are  retained  by  the 
passenger,  the  carrier  is  liable  only  as  a  bailee  for  hire.  That  is, 
the  carrier  is  liable  only  for  ordinary  negligence,  and  is  obliged  to 
exercise  only  ordinary  care. 

A  carrier  is  permitted  to  charge  for  excess  baggage,  and  be- 
comes liable  as  an  insurer  of  such  baggage.     A  carrier  is  not  obliged 


COMMERCIAL  LAW  221 

to  carry  any  baggage  not  necessary  for  the  convenience  or  comfort 
of  a  passenger,  and  if  attempt  is  made  to  carry  it  as  personal  bag- 
gage, the  carrier  does  not  become  Uable  for  loss  or  injury  thereto. 
Sample  goods  carried  by  traveling  salesmen  do  not  constitute  per- 
sonal baggage.  A  carrier  is  not  permitted  to  carry  these  samples 
free  of  charge.  If  the  freight  is  paid  by  the  salesman,  the  carrier 
becomes  liable  as  an  insurer. 

INNKEEPERS 

275.  Innkeeper  Defined.  An  innkeeper  is  a  person  who  keeps 
a  public  house  for  the  entertainment,  for  compensation,  of  all  fit  per- 
sons who  desire  to  become  guests  and  who  are  willing  to  pay  the  regu- 
lar price.  Aji  innkeeper  furnishes  both  food  and  lodging  to  guests. 
Persons  who  furnish  one  or  the  other,  only,  are  not  innkeepers. 
Innkeepers  are  classed  as  exceptional  bailees.  They  are  liable  as 
insurers  of  their  guests'  baggage  entrusted  to  their  care.  A  boarding- 
house  keeper  is  not  an  innkeeper.  A  restaurant  keeper  is  not  an 
innkeeper. 

276.  Duties  and  Liabilities  of  Innkeeper.  Innkeepers  are 
obliged  to  receive  all  fit  persons  who  present  themselves  as  guests 
and  who  offer  the  regular  price  for  entertainment.  An  innkeeper 
is  obliged  by  reason  of  his  public  profession,  to  keep  food  and  lodging 
facilities  sufficient  to  meet  all  reasonably  expected  demands.  Like 
a  carrier  of  passengers,  an  innkeeper  is  not  obliged  to  receive  ob- 
noxious persons.  After  a  traveler  has  been  received  by  an  inn- 
keeper for  the  purpose  of  obtaining  food  and  lodging,  he  is  a 
guest.  The  innkeeper  is  then  obliged  to  use  reasonable  care  for 
the  protection  of  the  guest.  A  person  who  boards  at  an  inn  is 
not  a  guest,  neither  is  one  who  rooms  at  an  inn,  but  does  not  board 
there. 

An  innkeeper  is  liable  as  an  insurer,  for  the  loss  of,  or  damage 
to,  the  goods  entrusted  to  his  care  by  his  guest.  If  the  goods  are  lost 
or  injured  without  any  negligence  on  the  part  of  the  guest  himself, 
and  not  by  an  Act  of  God  (see  Act  of  God,  chapter  on  Carriars), 
or  by  a  public  enemy,  the  innkeeper  is  liable  to  the  giltJtf^it  the 
goods  are  retained  by  the  guest,  and  remain  in  his  possession  and 
control,  the  innkeeper  is  not  liable  as  an  insurer  for  their  protection, 
but  is  obliged  to  exercise  only  ordinary  care. 


222  COMMERCIAT.  T.AW 

277.  Lien  of  Innkeeper.  An  innkeeper  has  a  right  to  retain 
possession  of  the  goods  of  his  guests  until  he  receives  his  compensa- 
tion. This  is  called  an  innkeepers'  lien.  At  common  law,  a  board- 
ing-house keeper  has  no  lien  on  the  goods  of  the  boarder.  Some 
states  provide  by  statute  for  a  boarding-house  keeper's  lien  upon  the 
goods  of  a  boarder.  Even  though  the  goods  brought  to  an  inn  are 
the  goods  of  a  third  person,  the  innkeeper  has  a  lien  thereon  for  the 
charges  of  the  guest,  unless  the  innkeeper  knows  at  the  time  of  receiv- 
ing the  guest,  that  the  goods  belonged  to  another.  Unless  otherwise 
provided  by  statute,  an  innkeeper  cannot  sell  the  goods  of  a  guest 
upon  which  he  has  a  lien,  but  must  file  a  bill  in  equity,  a  petition  in 
a  court  of  equity  requiring  the  goods  to  be  sold  under  order  of  court 
for  the  payment  of  his  charges. 

REAL  PROPERTY 

278.  Real  Property  Defined.  The  great  English  legal  writer, 
Blackstone,  divides  all  property  into  two  kinds,  real  and  personal. 
The  latter  embraces  everything  of  a  movable  nature,  while  the  former 
embraces  everything  of  a  permanent  nature.  Blackstone  defines 
real  property  as  consisting  of  lands,  tenements  and  hereditaments. 
By  land  is  meant  the  soil,  and  everything  above  and  beneath  the 
soil,  the  trees  and  vegetation  above  as  well  as  the  deposits  beneath 
the  soil.  By  tenement  is  meant  anything  that  may  be  held,  such 
as  a  franchise  or  right  of  way.  By  hereditament  is  meant  every- 
thing that  can  be  inherited.  It  includes  lands  and  tenements.  Under 
the  English  law,  heirlooms  were  considered  hereditaments.  They 
are  not  so  considered  under  our  law. 

279.  Trees,  Growing  Crops,  and  Emblements.  Growing  trees 
are  part  of  the  land  and  are  considered  real  property.  Nursery  trees 
may  be  planted  by  a  tenant  for  the  purpose  of  the  tenancy.  In  this 
event,  they  are  considered  personal  property.  Trees  cut  down  and 
cut  into  logs  are  personal  property.  Trees  blown  down  or  cut  down, 
but  not  cut  into  logs  are  real  property.  Trees  sold,  but  not  cut,  are 
regarded  as  personal  property.  A  practical  distinction  between  real 
and  personal  property  is  that  real  property  passes  to  the  heirs  at  the 
death  of  the  owner,  while  personal  property  passes  to  the  executors 
or  administrators  of  the  owner's  estate.  Personal  property  is  first 
subjected  in  the  satisfaction  of  judgments  at  law  against  the  owner. 


COIMMERCIAL  LAW  223 

Emblement  is  the  term  applied  to  crops  which  must  be  planted 
annually.  Such  crops  as  corn,  potatoes,  wheat,  and  melons  are 
emblements.  They  are  personal  property  even  though  not  severed 
from  the  soil.  They  belong  to  the  tenant  who  plants  them.  Apples, 
peaches,  clover,  and  similar  things  which  are  harvested  annually, 
but  are  grown  from  roots  or  trees  which  are  not  planted  annually, 
are  real  property.  They  are  a  part  of  the  real  estate,  and  pass  with 
it  when  the  latter  is  transferred. 

280.  Party  Walls.  A  wall  between  two  estates  standing  partly 
on  the  land  of  each  estate  is  a  party  wall.  If  injured  or  destroyed  by 
one  of  the  adjoining  owners,  the  other  has  an  action  for  damages 
against  him  by  reason  thereof.  If  a  wall  stands  wholly  upon  the 
land  of  one  owner,  and  another  constructs  his  house  using  a  part  of 
the  wall  as  a  foundation,  he  is  a  trespasser  and  is  liable  in  damages, 
or  may  be  compelled  to  remove  his  house  therefrom.  If,  however, 
he  is  permitted  to  use  the  wall  in  such  a  manner  for  twenty  years, 
the  wall  is  regarded  as  a  party  wall.  The  party  so  using  the 
wall  for  twenty  years  is  said  to  acquire  an  easement  by  prescription. 
Party  walls  are  owned  in  common  by  adjoining  owners.  Each 
party  does  not  own  half  the  wall.  Both  parties  own  the  entire  wall 
together. 

281.  Fixtures.  By  attaching  a  piece  of  personal  property 
permanently  to  the  land,  or  to  something  permanently  connected 
with  the  land,  the  personal  property,  in  law,  becomes  a  part  of  the 
realty.  A  tenant  may  so  attach  personal  property  to  the  land  of  his 
landlord  as  to  lose  title  thereto.  No  distinct  line  can  be  drawn  be- 
tween articles  which  may  constitute  fixtures  and  those  which  may 
not.  It  is  something  of  a  matter  of  intention  of  the  one  so  attaching 
the  articles  to  the  land.  It  is  now  usually  conceded  by  the  courts 
that  a  tenant  may  attach  such  articles  to  the  real  property  as  are 
necessary  and  desirable  for  the  purpose  of  his  tenancy,  and  may 
remove  them  at  or  before  the  expiration  of  his  lease,  if  the  same  can 
be  done  without  injury  to  the  real  estate  or  to  the  fixtures  to  which 
they  are  attached.  A  different  rule  is  applied  in  case  of  an  owner 
as  against  a  purchaser  or  mortgagee.  For  example,  if  A  leases  a 
building  for  the  purpose  of  operating  a  dry  goods  store,  he  is  per- 
mitted to  put  in  shelves  and  to  remove  them  at  the  expiration  of  the 
tenancy.     If  A  were  the  owner,  and  permanently  attached  the  shelves. 


224  COMMERCIAL  LAW 

he  could  not  remove  them  as  against  a  purchaser  of  the  building  or 
a  mortgagee. 

282.  Fences.  Most  of  the  states  have  statutes  regulating  the 
building  and  maintenance  of  fences.  Parties  may  enter  into  a  con- 
tract relating  to  partition  fences  if  they  choose.  The  duty  to  main- 
tain certain  portions  of  a  partition  fence  may  result  from  usage. 
If  A  and  B  are  adjacent  owners  of  a  farm,  and  A  has  for  a  period  of 
twenty  years  maintained  a  certain  portion  of  the  partition  fence,  he 
may  be  compelled  to  continue  to  maintain  that  portion  of  the  fence. 
A  partition  fence  constructed  jointly  by  the  adjacent  owners  is  their 
common  property.  It  is  their  joint  duty  to  keep  it  up.  Either  one 
has  a  right  to  go  upon  the  premises  of  the  other  for  that  purpose. 
One  person  may  construct  a  fence  on  his  own  premises,  which  he 
may  rebuild  or  take  away  at  pleasure.  A  person  constructing  a  fence 
must  use  reasonable  care  in  seeing  that  it  is  so  constructed  and  kept 
up  that  stock  coming  in  contact  with  it  is  not  injured. 

283.  Private  Ways.  The  right  to  go  over  the  land  of  another 
is  known  in  law  as  a  way.  Originally,  ways  were  of  three  kinds,  a 
mere  foot  way,  a  foot  and  horse  way,  by  which  a  horse  might  be  ridden 
over  the  way,  and  a  cart  way.  The  last  two  classes  are  now  treated 
as  one.  Ways  are  classified  as  ways  of  necessity  and  ways  of  con- 
venience or  easements. 

If  A  sells  land  to  B  and  the  only  access  B  has  to  a  highway  is 
over  A*s  land,  B  has  a  way  of  necessity  over  A's  land.  If  A  sells 
land  to  B  and  the  only  access  to  a  highway  left  to  A  is  over  the  land 
olB,  A  has  a  way  of  necessity  over  B's  land. 

A  way  of  convenience  may  arise  by  continuous  usage  under  a 
claim  of  right  for  a  period  of  twenty  years.  If  A  for  an  uninterrupted 
period  of  twenty  years,  under  claim  of  right  uses  a  path  over  B^s 
premises,  he  acquires  a  way  of  convenience  or  easement  which  gives 
him  the  right  to  continue  the  use  of  the  path. 

284.  Highways.  Ordinarily,  highways  are  established  by  public 
oflBcials  acting  under  statutory  authority.  Land  is  taken  from  the 
owners  by  order  of  court  granted  upon  a  petition  properly  filed  and 
heard.  It  is  said  that  the  public  has  an  easement  in  a  highway,  a 
right  to  use  the  highway  as  a  roadway.  The  absolute  title  remains 
in  the  original  owner.  If  the  highway  is  abandoned,  the  property 
reverts  to  the  original  owner  or  to  his  grantees  or  assignees. 


COMIMERCIAL  LAW  225 

A  highway  may  be  created  by  declaration  or  admission  of  the 
owner  that  a  certain  piece  of  property  is  to  be  used  as  a  highway. 
It  must  also  be  accepted  as  such  by  public  officials.  The  public 
may  also  obtain  the  right  to  use  certain  property  as  a  highway  by 
adverse  user  for  a  period  of  twenty  years.  This  is  called  obtainmg 
the  right  by  prescription. 

285.  Estates  in  Land.  The  extent  of  the  interest  of  a  person 
in  a  certain  piece  of  land  or  real  estate  is  said  to  be  his  estate.  Estates 
are  designated  by  different  names,  depending  upon  the  amount  of 
the  interest  held.  In  general,  estates  in  land  are  divided  into  free- 
hold estates  and  estates  less  than  freehold.  Freehold  estates  are  in 
turn  divided  into  estates  of  inheritance,  and  estates  less  than  inheri- 
lance.  Estates  of  inheritance  are  divided  into  estates  in  fee  simple, 
and  estates  in  fee  tail.  Estates  less  than  inheritance  consist  of  dower 
estates,  estates  curtesy,  estates  for  the  life  of  another,  and  estates  for 
one's  own  life,  and  homestead  estates.  Estates  less  than  freehold  or 
leasehold  estates  consist  of  estates  for  years,  from  year  to  year,  at 
sufferance  and  at  will. 

286.  Freehold  Estates.  Freehold  estates  embrace  estates  of 
inheritance  and  estates  less  than  inheritance.  They  are  estates  of 
uncertain  periods  of  duration.  The  estate  may  be  one  of  inheritance, 
that  is,  forever,  or  for  a  lifetime.  The  term,  freehold,  is  taken  from 
the  name,  freeman.  A  freehold  estate  originally  applied  to  the  estate 
of  a  freeman.  A  freeman,  that  is,  a  person  permitted  to  go  anywhere 
he  chose,  belonged  to  the  only  class  of  persons  permitted  to  hold 
estates  of  this  character.  The  meaning  of  the  term  has  lost  its  sig- 
nificance.    Under  our  law,  all  persons  are  freemen. 

287.  Estates  in  Fee  Simple.  Absolute  ownership  in  land  is 
termed  an  estate  in  fee  simple.  It  means  that  the  owner  has  absolute 
and  unconditional  ownership  of  the  land  in  question.  It  is  an  estate 
of  general  inheritance.  At  the  owner's  death,  the  estate  passes  to 
the  general  heirs  of  the  owner,  unless  particular  persons  are  desig- 
nated by  will  of  the  owner  to  take  the  title. 

288.  Estates  Tail.  It  was  formerly  the  custom  in  England 
for  wealthy  land  owners  to  give  land  to  the  oldest  son  to  be  given  by 
him  to  his  oldest  son,  a  particular  person  or  his  direct  heirs.  That  is, 
instead  of  giving  the  entire  interest  in  the  land  to  a  person  in  such  a 
manner  that  the  latter  could  sell  or  dispose  of  it  as  he  chose,  it  was 


226  COMMERCIAL  LAW 

given  by  deed  or  will  to  a  particular  line  of  heirs  or  persons.  If  A 
gave  his  property  by  will  to  B  and  B's  direct  heirs,  the  estate  created 
did  not  permit  B  or  his  direct  heirs  to  dispose  of  the  estate  in  such  a 
manner  that  the  direct  heirs  designated  could  be  deprived  of  the 
estate  at  B's  death.  Granting  estates  to  a  particular  person  or  heir 
rather  than  to  heirs  generally,  is  called  entailing  estates.  The  estate 
granted  is  called  an  estate  tail.  The  result  of  entailing  estates  is  to 
continue  them  in  the  hands  of  a  few. 

England  no  longer  permits  the  entailing  of  estates  for  long 
periods.  In  this  country,  the  matter  is  controlled  by  statutes  of  the 
different  states.  A  person  is  permitted  to  give  real  estate,  by  will,  to 
a  person  for  the  latter's  life,  and  then  to  a  person  not  yet  born.  The 
latter  takes  the  estate  in  fee.  A  person  is  not  permitted  to  give  prop- 
erty to  A,  and  to  the  unborn  child  of  the  unborn  child  oi  A.  If  this  is 
attempted,  when  A  has  a  child,  the  latter  takes  an  estate  in  fee  simple. 
The  above  doctrine  is  called  the  rule  against  perpetuities. 

289.  Life  Estates.  An  estate  created  to  exist  during  the  life 
of  the  holder,  during  the  life  of  a  third  person,  or  until  an  uncertain 
event  happens  or  fails  to  happen,  is  called  a  life  estate.  Life  estates 
embrace  homestead  estates,  dower  estates,  and  estates  by  the  curtesy. 
If  A  gives  B  a  farm  for  life,  remainder  in  fee  to  C,  B  takes  a  life  estate. 
He  may  sell  or  transfer  his  life  estate,  but  no  more.  If  A  dies  leaving 
a  will,  by  the  terms  of  which  B,  his  wife,  is  given  a  farm  for  life,  or 
during  widowhood,  B  takes  a  life  estate  in  the  farm.  If  she  marries, 
she  loses  her  estate.  This  estate  may  be  created  by  deed  as  well  as 
by  will. 

290.  Estates  by  the  Curtesy.  At  common  law,  the  husband, 
at  the  wife's  death,  has  a  life  estate  in  the  real  property  owned  by  the 
wife,  if  issue  has  been  born  alive  during  the  life  of  the  wife.  The 
husband  may  waive  his  right  to  the  estate  if  he  signs  a  deed  with  the 
wife,  whereby  he  expressly  waives  his  right  to  his  estate  by  the  cur- 
tesy. The  interest  of  the  husband  in  the  estate  of  his  wife,  is  at  the 
present  time  in  most  states  regulated  by  statute. 

29  L  Dower  Estates.  At  common  law,  at  the  death  of  her 
husband,  a  wife  takes  a  life  interest  in  one-third  the  real  property 
owned  by  her  husband  during  the  marriage.  If  A  owns  one  hundred 
acres  of  land,  and  dies,  leaving  a  wife,  B,  B  takes  one-third  interest 
for  life  in  the  one  hundred  acres  of  land.    This  interest  of  B  is  called 


COMMERCIAL  LAW  227 

her  dower  estate.  Some  states  by  statute  provide  that  the  wife  shall 
have  a  definite  share  of  the  husband's  estate  at  the  latter's  death.  In 
the  states  having  these  statutes,  the  wife  is  not  entitled  to  dower,  but 
takes  the  prescribed  share  in  place  thereof.  The  husband  cannot 
deprive  the  wife  of  right  of  dower,  by  transferring  his  real  estate. 
If  she  does  not  expressly  release  dower  in  the  deed  of  conveyance, 
it  may  be  enforced  against  the  estate,  if  she  survives  her  husband. 

292.  Exempt  Estates.  The  states  generally  provide  by  statute 
that  certain  property  shall  be  exempt  from  execution  on  judgment 
obtained  by  creditors  of  the  owner.  Exemption  statutes  usually 
provide  that  a  certain  amount  of  real  estate  used  as  a  home  by  the 
owner  shall  not  be  subjected  to  the  satisfaction  of  judgments  of 
creditors.  If  the  debtor  has  no  real  property  used  as  a  home,  he  is 
sometimes  permitted  to  retain  a  certain  amount  of  personal  property 
in  place  thereof.  This  statutory  right  to  keep  a  certain  amount  of 
real  property  exempt  from  creditors  is  sometimes  called  a  debtor's 
homestead  estate.     It  exists  during  the  life  of  the  owner. 

293.  Estates  for  Years.  The  right  to  the  possession,  or  the 
contract  for  possession  of  land  for  a  definite  period  of  time  is  called 
an  estate  for  years.  Originally  in  England,  only  freemen  could  hold 
freehold  estates.  Freehold  estates  are  those  of  inheritance  and  those 
less  than  inheritance.  Persons  occupying  a  position  inferior  to  that 
of  freemen  under  the  early  English  law,  sometimes  called  villeins, 
were  permitted  to  hold  estates  for  years,  but  not  freehold  estates. 

If  A  leases  his  farm  to  B  for  five  years,  B  has  an  estate  for  years. 
If  A  leases  his  house  and  lot  to  B  for  one  month,  B  has  an  estate  for 
years.  If  A  leases  his  house  and  lot  to  B  for  two  years,  and  to  C  for 
three  years,  C's  estate  to  follow  B's,  B  and  C  have  estates  for  years. 
Estates  for  years  are  also  discussed  under  Landlord  and  Tenant. 
Estates  for  years  are  commonly  called  leases  or  leaseholds.  A  holder 
of  an  estate  for  years  may  assign  or  sublet  his  estate,  unless  it  is  pro- 
vided otherwise  in  his  lease. 

294.  Waste.  If  persons  have  estates  for  years  or  life  in  real 
property,  certain  rules  for  the  use  of  such  property  are  recognized 
in  order  that  they  may  not  destroy  or  injure  the  remaining  estate. 
That  is,  if  A  has  an  estate  for  life  in  a  farm,  and  B  has  the  remainder, 
A  is  not  permitted  to  destroy  B's  interest.  If  a  tenant  for  life  or 
years  so  treats  the  estate  as  permanently  to  injure  it,  he  is  said  to 


228  COMMERCIAL  LAW 

commit  ivasie.  A  tenant  for  life  is  not  permitted  to  cut  off  the  tim- 
ber. He  may  cut  out  underbrush.  If  such  is  the  custom  in  the 
vicinity,  he  may  cut  timber  for  fuel  and  to  repair  buildings  and 
fences.  The  general  rule  is,  that  a  tenant  for  life  or  years  may  so 
use  the  estate  as  not  permanently  to  injure  or  destroy  it.  He  is 
entitled  to  the  fruits  and  crops,  to  cultivate  the  estate  to  advantage, 
but  not  to  destroy  the  buildings  or  fences,  or  to  so  treat  the  land  as 
ultimately  to  destroy  its  productiveness. 

295.  Estates  at  Will  and  at  Sufferance.  Estates  at  will  and 
at  sufferance  are  discussed  under  the  title  of  Landlord  and  Tenant. 
They  are  estates  in  land,  and  are  classified  as  estates  less  than  free- 
hold. An  estate  which  may  be  ended  at  the  desire  or  will  of  either 
party  is  known  as  an  estate  at  will.  If  A  and  B  agree  that  A  may 
occupy  B^s  house,  A  to  pay  thirty  dollars  per  month,  the  tenancy  to 
cease  at  the  desire  of  either  party,  A  is  said  to  be  a  tenant  at  will, 
and  the  estate  he  possesses  is  called  an  estate  at  will.  It  is  not 
transferable.  If  A  attempts  to  assign  his  lease,  it  ceases.  An 
estate  at  will  is  terminated  by  either  party  notifying  the  other  of  his 
intention  to  terminate  the  lease  or  by  either  party  doing  anything 
inconsistent  with  the  estate.  If  the  owner  dies,  the  estate  is  ter- 
minated. 

If  a  person  has  a  lawful  estate  in  land,  and  retains  possession 
without  right  after  his  interest  ceases,  he  is  said  to  be  a  tenant  at  suffer- 
ance. If  A  rents  B^s  house  for  one  year,  and,  at  the  expiration  of 
the  year  he  still  occupies  the  house  without  B's  consent,  he  is  a  tenant 
at  sufferance.  He,  in  fact,  has  no  estate  in  the  premises  except  that 
which  the  owner  suffers  him  to  enjoy.  This  interest  is  called  an 
estate  at  sufferance.  A  tenant  at  sufferance  is  a  wrongdoer.  He 
may  be  ejected  at  the  will  of  the  owner.  The  owner  is  not  permitted 
to  use  excessive  force  in  ejecting  a  tenant  at  sufferance.  He  may 
use  the  force  necessary  to  eject  him.  At  the  present  time,  most  of 
the  states  have  statutory  provisions  by  which  unlawful  tenants  may 
be  ejected  by  legal  process. 

296.  Estates  in  Remainder.  There  may  be  many  estates  in 
the  same  piece  of  real  property.  If  an  owner  of  an  estate  in  fee 
simple  by  one  instrument  grants  an  estate  less  than  fee  simple  to 
one  person  and  the  balance  of  the  fee  simple  estate  to  another,  the 
latter  estate  is  called  a  remainder.     If  A,  an  owner  in  fee,  by  the  same 


COMMERCIAL   LAW  221) 

instrument  grants  B  an  estate  for  life,  remainder  in  fee  to  C,  C  has 
an  estate  in  remainder.  If  C  is  living  at  the  time  the  estate  is  granted, 
the  estate  in  remainder  vests  in  him  at  the  time  of  the  grant,  and  is 
called  a  vested  remahider.  If  the  estate  in  remainder  depends  upon 
any  contingency,  or  is  conditional  in  any  way  it  is  said  to  be  a  con- 
tingent remainder.  If  A  grants  a  life  estate  in  his  farm  to  B,  and  the 
remainder  to  the  heirs  of  C,  the  heirs  of  C  cannot  be  determined  until 
Cs  death.     The  estate  in  remainder  is  said  to  be  contingent. 

297.  Estates  in  Reversion.  An  owner  of  an  estate  in  real 
property  in  fee  simple  is  permitted  to  grant  his  interest  in  the  form 
of  as  many  estates  as  he  pleases.  As  long  as  the  total  of  his  grants 
do  not  equal  his  interest,  he  is  said  to  retain  an  estate  in  reversion. 
If  A  owns  a  farm  in  fee  simple,  and  grants  B  an  estate  for  ten  years, 
A's  remaining  interest  is  called  an  estate  in  reversion. 

298.  Title  to  Real  Property.  Title  to  real  property  or  the  right 
of  the  owner  eventually  to  obtain  possession  of  it  may  be  acquired 
in  several  ways.  Mere  occupancy  under  claim  of  title  will,  under 
certain  circumstances,  if  for  a  certain  uninterrupted  period  of  time, 
give  the  occupant  title.  An  uninterrupted  possession  of  real  prop- 
erty, under  a  claim  of  right  for  a  period  in  excess  of  twenty  years  will 
in  most  states  give  the  occupant  title  by  adverse  possession. 

Civilized  nations  provide  by  law  that  the  heirs  of  the  owner  of 
real  property  shall  take  the  title  to  the  property  at  the  owner's  death. 
Estates  less  than  freehold  pass  as  personal  property  to  the  executors 
of  the  estate  of  the  deceased  owner.  The  statutes  of  the  different 
states  designate  who  are  heirs. 

Title  to  land  owned  by  the  government  is  transferred  by  public 
grant.  Title  by  an  owner  may  be  conveyed  to  another  by  voluntary 
gift,  by  devise  or  will,  or  by  deed.  Title  by  devise  or  will  is  discussed 
in  the  chapter  on  Wills. 

299.  Deeds.  The  customary  method  of  transfer  of  real  prop- 
erty is  by  deed.  A  deed  is  a  written  instrument  scaled  and  delivered 
for  the  conveyance  of  land.  Deeds  were  originally  divided  into 
deeds-poll,  and  indentures.  Deeds-poll  were  mere  written  obliga- 
tions of  the  grantor  delivered  to  the  grantee,  the  grantee  making  no 
covenants.  An  indenture,  on  the  other  hand,  consists  of  mutual 
obligation  on  the  part  of  grantor  and  grantee.  The  obligation  of 
each  was  reduced  to  writing,  signed,  sealed,  and  delivered,  the  one 


230  COMMERCIAL  LAW 

in  exchange  for  the  other.  A  lease  is  an  example  of  an  indenture. 
The  term,  indenture,  originated  from  the  custom  of  writing  the  obli- 
gation of  both  parties  on  the  same  piece  of  paper,  and  by  writing 
some  letters  of  the  alphabet  between  the  two  agreements,  and  by 
cutting  the  paper  through  these  letters  at  sharp  angles.  The  sepa- 
rate obligations  could  be  identified  by  fitting  together  the  saw-tooth 
edges  of  the  different  instruments.  At  present,  duplicate  copies  are 
made  designating  them  as  indentures.  Leases  are  discussed  more 
at  length  in  the  chapter  on  Landlord  and  Tenant. 

At  present,  the  form  of  deeds  in  common  use  are  quit  claim  deeds 
and  warranty  deeds.  Some  states  provide  forms  of  deeds  by  stat- 
ute. Even  in  the  absence  of  statute,  a  written  instrument,  properly 
signed  and  delivered  by  the  grantor,  containing  a  description  of  the 
property,  and  an  expression  of  intention  to  convey  the  real  estate 
described,  is  probably  sufficient  to  constitute  a  deed.  A  formal  deed 
is  customarily  used.  Transfers  of  real  property  are  important 
transactions.  A  formal  deed  contains  several  formal  parts  known 
by  different  names.  These  formal  parts  have  resulted  from  well 
recognized  customs  and  practices,  some  of  them  dating  back  a  great 
many  years.  The  formal  parts  of  a  warranty  deed  are  the  -premises, 
the  habendum,  the  redendum,  the  conditions,  the  warranties  or  cove- 
nants, the  conclusions  and  the  acknowledgment. 

300.  Premises  of  a  Deed.  The  premises  of  a  deed  contain  the 
name  and  description  of  the  parties.  If  a  deed  is  given  by  an  un- 
married person,  he  should  be  designated  in  the  premises  of  the  deed 
as  A  B,  unmarried.  This  enables  abstractors  of  titles  to  determine 
that  a  complete  transfer  of  title  has  been  made.  Otherwise  there  is 
nothing  to  show  that  A  B  did  not  have  a  wife  at  the  time  the  transfer 
was  made.  In  this  event,  the  wife  would  retain  her  right  of  dower. 
The  premises  usually  contain  the  date  of  instrument.  Sometimes,  the 
date  is  placed  at  the  end  of  the  instrument.  The  consideration  is 
also  contained  in  the  premises.  The  consideration  of  a  deed  may 
be  either  good  or  valuable.  If  the  grantor  receives  something  of 
value,  as  money  or  an  article  of  value,  the  consideration  is  said  to  be 
valuable.  If  a  parent  grants  real  property  to  a  child  or  relative  and 
states  the  consideration  to  be  love  and  affection,  the  consideration 
is  adequate,  and  is  known  as  good  consideration.  The  receipt  of  the 
consideration  is  also  acknowledged  in  the  premises  of  a  deed.     The 


COMMERCIAL  LAW  231 

language  by  which  the  grantor  conveys  the  estate,  such  as  "give," 
"grant,"  "set  over,"  and  "release"  is  contained  in  the  premises  as 
well  as  the  description  of  the  estate  granted. 

301.  Habendum  and  Redendum  Clauses.  The  premises  of  a 
deed  are  followed  by  the  habenduTn  and  redendum  clauses.  The 
hahendum  clause  describes  the  estate  granted,  whether  an  estate  in 
fee,  an  estate  for  life,  or  an  estate  for  years.  It  is  not  necessary  to 
repeat  the  description  of  the  estate  in  the  hahendum  clause.  The 
habendum,  clause  usually  commences  with  the  words,  "To  have  and 
to  hold." 

The  redendum  clause  contains  any  interests  or  rights  retained 
by  the  grantor.  If  the  grantor  reserves  to  himself  the  right  to  use  a 
certain  driveway,  he  places  this  reservation  in  the  redendum  clause. 

302.  The  Conditions,  Warranties  and  Covenants  of  a  Deed. 
A  warranty  deed  may  not  be  an  absolute  transfer  of  real  property, 
but  may  be  conditional.  For  example,  if  the  deed  is  absolute  in 
form,  but  contains  a  condition  that  the  transfer  is  to  be  of  no  effect 
if  the  grantor  pays  the  grantee  a  certain  sum  of  money  by  a  certain 
time,  the  deed  is  a  conditional  one.  The  conditions  above  described 
constitute  the  deed  a  mortgage.  This  class  of  conditional  transfer 
is  discussed  in  the  following  chapter.  Most  deeds  are  without  con- 
ditions. 

The  next  formal  part  of  a  warranty  deed  is  the  covenant  of 
warranty.  The  grantor  covenants  that  he  is  lawfully  seized  of  the 
estate.  This  means  that  the  grantor  has  the  legal  title  and  right  to 
possession,  which  right  he  conveys  to  the  grantee.  The  grantor 
also  covenants  that  the  grantee  shall  have  quiet  enjoyment  of  the 
estate,  that  the  estate  is  free  from  incumbrance,  and  that  the  grantor 
and  his  heirs  warrant  the  title  to  the  estate. 

303.  The  Conclusion  of  a  Deed.  The  conclusion  of  a  deed 
contains  the  signature  of  the  grantor  and  the  statement  that  he  has 
signed  and  sealed  the  deed.  Most  states  require  by  statute  that  a 
deed  must  be  signed  in  the  presence  of  two  witnesses.  The  signature 
and  statement  of  the  witnesses  to  the  effect  that  the  deed  was  signed 
in  their  presence  is  a  part  of  the  conclusion.  The  mere  statement 
that  the  grantor  signs  and  seals  the  deed  makes  it  a  sealed  instru- 
ment. Seals  were  originally  impressions  made  in  wax  affixed  to  the 
instrument.     A  scroll  or  flourish  of  the  pen  was  regarded  as  a  seal. 


232  COMMERCIAL  I>AW 

hut  at  present  a  deed  is  in  Itself  regarded  as  a  sealed  instrument,  and 
re(juir(\s  no  seal  nor  substitute  therefor. 

304.  Acknowledgment  of  a  Deed.  The  states  of  this  country 
require  by  statute,  deeds  to  be  recorded  by  the  public  recorder,  if 
parties  to  the  deed  desire  to  give  notice  of  the  transfer  to  third  persons. 
Third  persons  are  deemed  to  have  notice  of  deeds  so  recorded  even 
though  they  have  no  actual  notice.  For  the  purpose  of  having  a 
deed  recorded,  the  grantor  must  acknowledge  his  signature  before 
a  notary  public  who  adds  his  statement  to  that  effect  to  the  deed,  and 
signs  and  seals  the  same.  A  quit  claim  deed  contains  no  warranties 
nor  covenants.  It  is  merely  a  release  of  the  grantor's  interest  to  the 
grantee. 


QUIZ  QUESTIONS 

BAILMENT 


1.  Define  bailment. 

2.  For  whose  benefit  may  bailment  be  made? 

3.  Distinguish  a  bailment  from  a  sale. 

4.  Give  an  example  of  a  bailment. 

5.  Name  and  define  the  parties  to  a  bailment  contract. 

6.  May  an  infant  enter  into  a  bailment  contract? 

7.  Is  an  infant  liable  for  his  torts? 

8.  Classify  bailments. 

9.  Give  an  example  of  a  bailment  for  the  mutual  benefit  of 
both  bailor  and  bailee. 

10.  Is  a  bailment  a  contract? 

11.  What  is  the  consideration  in  a  bailment  for  the  sole  benefit 
of  the  bailor? 

12.  What  party  to  a  bailment  contract  has  possession  of  the 
property? 

13.  Is  a  finder  of  lost  property  a  bailee? 

14.  In  whom  is  the  title  to  bailed  property? 

15.  Are  the  title  and  possession  in  the  same  person? 

16.  May  a  person  not  the  owner  of  property  bail  it? 

17.  Give  an  example  of  a  bailment  for  the  sole  benefit  of  the 
bailor. 


COMMERCIAL  LAW  233 

18.  'What  degree  of  care  is  required  of  a  bailee  in  case  rfie  bail- 
ment is  for  the  sole  benefit  of  the  bailor? 

19.  Give  an  example  of  a  bailment  for  the  sole  benefit  of  the 
bailee. 

20.  WTiat  degree  of  care  is  required  of  a  bailee  in  a  bailment 
for  his  sole  benefit? 

21.  A  hires  of  B  an  automobile  for  S3.()0  per  hour.  Is  the 
bailment  for  the  sole  benefit  of  the  bailor,  the  bailee,  or  for  the  mutual 
benefit  of  both  parties? 

22.  In  the  above  example  what  degree  of  care  is  required  ©f 
Af 

23.  ^\Tiat  implied  warranties  accompany  mutual  benefit  bail- 
ments? 

24.  Define  and  distinguish  public  and  private  warehousemen. 

25.  What  are  government  warehouses? 

26.  Are  warehouse  receipts  negotiable? 

27.  WTiat  degree  of  care  is  required  of  warehousemen? 

28.  WTiat  degrees  of  care  are  recognized  in  bailments? 

29.  How  is  the  standard  for  determining  degrees  of  care 
arrived  at? 

30.  Is  ordinary  care  the  same  in  the  bailment  of  different  kinds 
of  property? 

31.  If  a  third  person  takes  property  away  from  a  bailee  may 
the  latter  recover  possession? 

32.  What  are  the  rights  of  a  person  purchasing  from  a  bailee? 

33.  What  is  meant  by  liejis  on  personal  property? 

34.  A  leaves  his  watch  with  B  for  repairs.  B  repairs  the 
watch.     Can  B  retain  possession  until  he  receives  his  pay? 

35.  May  a  bailee  sell  property  to  satisfy  his  lien? 

PLEDGES 

1.  Is  a  pledge  a  bailment? 

2.  Define  a  pledge. 

3.  Does  title  to  property  pledged  remain  in  the  pledgor? 

4.  Distinguish  fledge  from  chattel  mortgage. 

5.  Name  and  define  the  parties  to  a  contract  of  pledge. 

6.  May  an  infant  pledge  property? 

7.  What  kinds  of  personal  property  may  be  pledged? 


234  COMMERCIAL  LAW 

8.  Can  a  person  pledge  personal  property  which  he  expects 
to  purchase? 

9.  Can  a  person  pledge  a  growing  crop? 

10.     What  is  the  purpose  of  a  contract  of  pledge? 
IL     Can  there  be  a  pledge  which  is  not  security  for  an  existing 
debt? 

12.  If  ^  delivers  possession  of  personal  property  to  5  but  does 
not  owe  B  anything,  is  the  transaction  a  pledge?  If  not  a  pledge, 
what  is  the  transaction? 

13.  Who  has  possession  of  pledged  property? 

14.  Does  the  pledgee  have  title  to  property  pledged? 

15.  In  case  of  a  chattel  mortgage  who  has  title  to  the  mortgaged 
property? 

16.  In  case  of  pledge  of  negotiable  instruments,  who  has  title 
to  the  instruments? 

17.  What  is  meant  by  loans  on  collateral  securitiesf 

18.  What  is  a  collateral  note? 

19.  By  whom  are  collateral  notes  commonly  used? 

20.  After  payment  of  the  debt  for  which  property  is  pledged, 
who  is  entitled  to  possession  of  the  pledged  property? 

21.  WTio  is  entitled  to  possession  of  property  pledged  before 
payment  of  the  debt  secured? 

22.  In  case  of  pledge  of  negotiable  instrument  w'ho  must  collect 
the  interest  and  instrument  when  due? 

23.  What  degree  of  care  is  required  of  a  pledgee  in  the  protection 
of  pledged  property? 

24.  If  the  pledgor  fails  to  pay  the  debt  w^hen  due,  what  may 
the  pledgee  do  with  the  property? 

25.  In  selling  pledged  property  what  notice,  if  any,  should  the 
pledgee  give  the  pledgor? 

26.  "WTiat  is  meant  by  foreclosing  a  lien  in  equity? 

27.  Define  and  explain  redemption. 

28.  When  may  the  right  of  redemption  be  exercised  ? 

MORTGAGES  ON  PERSONAL  PROPERTY 

1.  Define  chattel  mortgage. 

2.  In  case  of  a  mortgage  of  personal  property,  who  has  pos- 
session of  the  property?    ^Vho  has  title? 


COMMERCIAL  LAW  235 

3.  Define  mortgagor  and  mortgagee. 

5.  Distinguish  chattel  mortgage  and  sale. 

4.  Distinguish  chattel  mortgage  and  pledge. 

6.  Distinguish  pledge  and  sale. 

7.  ^lay  choses  in  action  be  mortgaged? 

8.  Define  and  distinguish  choses  in  action  and  choses  in  pos- 
session. IMay  both  be  mortgaged? 

0.     AMiat  is  the  purpose  of  a  chattel  mortgage? 
10.     Does  a  chattel  mortgage  require  a  consideration? 
IL     Can  there  be  a  chattel  mortgage  without  a  debt  to  be 
secured? 

12.  Must  a  chattel  mortgage  be  in  writing? 

13.  A  mortgages  his  horse  to  B  to  secure  a  debt  of  $40  00.  A 
delivers  the  horse  to  B.     The  mortgage  is  oral.     Is  it  binding? 

14.  ^\Tiat  is  the  reason  for  filing  or  recording  a  chattel  mort- 
gage? 

15.  Does  a  chattel  mortgage  of  property,  possession  of  which  is 
given  the  mortgagee,  have  to  be  recorded  to  be  binding? 

10.  Who  is  entitled  to  possession  of  mortgaged  personal  prop- 
erty? 

17.  A  mortgages  his  household  furniture  to  B,  later  he  stores 
the  furniture  with  C.  C  acquires  a  storage  keeper's  lien.  Is  the 
latter's  lien  superior  to  B'sf 

18.  Does  a  mortgagor  retain  an  interest  which  he  may  dispose 
of? 

19.  Does  a  mortgagee  have  absolute  title  to  the  property  mort- 
gaged? 

20.  If  A,  the  mortgagee  of  personal  property,  sells  the  debt 
secured  by  the  mortgage  to  B,  what  becomes  of  the  mortgage? 

21.  ^^^len  the  mortgagor  defaults  in  payment  of  the  secured 
debt,  how  may  the  mortgagee  obtain  possession  of  the  property? 

22.  Define  equity  of  redemption. 

23.  Can  a  mortgagor  enforce  his  equity  of  redemption  after 
the  mortgagee  has  obtained  possession  of  the  property? 

24.  Can  a  mortgagee  enforce  his  equity  of  redemption  without 
paying  the  mortgage  debt? 

25.  Define  foreclosure. 

26.  Whsit  is  the  purpose  of  foreclosure? 


230  COMMERCIAL  LAW 

27.     How  is  foreclosure  enforced? 

CARRIERS 

1.  Define  and  give  an  example  of  common  carrier. 

2.  Define  and  give  an  example  of  jyrivate  carrier. 

3.  WTiat  constitutes  a  person  or  company  a  common  carrier 
of  goods? 

4.  Is  a  common  carrier  of  goods  obliged  to  carry  goods  of  all 
kinds? 

5.  Distinguish  common  carrier  and  'private  carrier. 

6.  What  is  the  exceptional  liability  of  a  common  carrier,  and 
what  is  the  reason  for  this  liability? 

7.  If  goods  intrusted  to  a  common  carrier  are  lost  without 
negligence  of  the  carrier  is  the  latter  liable  to  the  owner? 

8.  Is  the  exceptional  liability  of  an  insurer  a  matter  of  express 
or  implied  contract? 

9.  What  are   the  exceptions   to   the  liability  of  a   common 
carrier  as  an  insurer  of  the  goods  intrusted  to  his  care? 

10.  Define  and  give  an  example  of  public  enemy. 

11.  Define  and  give  an  example  of  Act  of  God. 

12.  Is  a  common  carrier  permitted  to  limit  his  common  law 
liability  as  an  insurer  of  the  goods  by  special  contract? 

13.  Is  a  common  carrier  permitted  to  stipulate  against  the  care- 
lessness of  his  agents  or  servants? 

14.  Is  a  common  carrier  permitted  to  limit  his  liability  as  an 
insurer  of  goods  by  stipulating  in  the  bill  of  lading  issued  that  the 
valuation  is  limited  to  a  certain  amount,  unless  informed  otherwise 
by  the  shippee? 

15.  Wliat  does  the  Interstate  Commerce  Act  provide  relative 
to  the  above  question? 

16.  WTiat  is  a  hill  of  lading? 

17.  Distinguish  bill  of  lading  and  shipping  receipt. 

18      Wliat  are  the  two  essential  features  of  a  bill  of  lading? 

19.  In  what  sense,  if  any,  is  a  bill  of  lading  a  negotiable  instru- 
ment? 

20.  A,  in  Cleveland,  orders  a  car  of  hogs  from  B,  in  Buffalo. 
B  delivers  the  hogs  to  the  railway  company  in  Buffalo,  to  be  shipped 
to  A  in  Cleveland.     In  whom  is  the  title  to  the  hogs? 


COMMERCIAL  LAW  237 

2L  U  A  stipulates  that  the  hogs  are  to  be  dehvered  F.  O.  B. 
Cleveland,  in  whom  is  the  title  to  the  hogs  after  they  are  delivered  to 
the  railway  company,  and  before  they  reach  Cleveland? 

22.  What  goods,  and  under  what  circumstances,  is  a  carrier 
obliged  to  accept  for  shipment? 

23.  Explain  the  meaning  of  stoppage  in  trcmsifu.  Under  what 
circumstances  is  a  shipper  permitted  to  exercise  the  right? 

24.  "What  carriers  are  obliged  to  make  delivery  at  the  residence 
or  place  of  business  of  the  consignee,  and  what  carriers  are  obliged 
only  to  deliver  at  their  depots  or  warehouses? 

25.  Define  and  explain  carrier's  lien. 

26.  How  may  a  carrier  enforce  his  lien? 

27.  \Miy  is  a  common  carrier  not  permitted  to  discriminate 
between  shippers? 

28.  When,  if  at  all,  is  a  carrier  of  mail  liable  for  negligence? 

29.  Is  the  government  liable  to  an  owner  of  mail  for  its  loss? 

30.  What  are  the  principal  features  of  the  Interstate  Commerce 
Act  of  1906? 

CARRIERS  OF  PASSENGERS 
L     Is  every  person  or  company  carrying  passengers  for  com- 
pensation a  common  carrier? 

2.  Are    owners    of    buildings    operating    elevators    common 
carriers  of  passengers? 

3.  Wlien  does  a  person  become  a  passenger? 

4.  Is  a  person  traveling  on  a  pass  a  passenger  within  the  legal 
meaning  of  the  term,  passenger? 

5.  Is  a  public  carrier  of  passengers  obliged  to  accept  all  who 
present  themselves  as  passengers? 

6.  When,  and  how,  may  a  public  carrier  eject  a  passenger? 

7.  What  degree  of  care  is  a  ])ublic  carrier  of  passengers  obliged 
to  exercise? 

8.  \Vhat  constitutes  baggage? 

9.  "WTiat  is  the  liability  of  a  carrier  of  passengers  for  loss  or 
injury  to  baggage? 

INNKEEPERS 
L     Must  a  person   represent  himself  as   being    ready    and 
willing  to  furnish  both  food  and  lodging  to  all  who  desire  to  become 
guests,  in  order  to  be  an  innkeepei  ? 


238  COMMERCIAL  LAW 

2.  Are  Ijoarding-housekeepers  innkeepers? 

3.  Are  innkeepers  obliged  to  receive  all  persons  who  present 
themselves  as  guests  if  the  regular  price  is  tendered? 

4.  AVliat  degree  of  care  in  the  protection  of  guests  is  required 
of  innkeepers? 

5.  What  degree  of  care  is  required  of  innkeepers  in  the  pro- 
tection of  the  baggage  of  guests? 

6.  What  is  an  irmkeeper's  lienf 

7.  How  may  an  innkeeper  enforce  his  lien? 

REAL  PROPERTY 

1.  Define  real  'property. 

2.  Wliat  is  included  in  the  term,  real  property? 

3.  Define  and  give  an  example  of  hereditament. 

4.  Define  and  give  an  example  of  tenement. 

5.  Are  standing  trees  real  or  personal  property? 

6.  Are  trees  blown  down  real  or  personal  property? 

7.  Wliat  is  the  practical  distinction  between  real  and  personal 
property? 

8.  Define  emblements. 

9.  Do  emblements  belong  to  the  tenant  or  to  the  landlord? 

10.  Are  apples  emblements?     If  not,  why  not? 

11.  How  may  a  wall  become  a  party  wall  by  proscription? 

12.  Define  fixtures. 

13.  Are  fixtures  real  or  personal  property? 

14.  Does  the  rule  as  to  fixtures  differ  in  case  of  a  tenant,  and 
in  case  of  an  owner? 

15.  Do  owners  of  adjoining  property  own  a  partition  fence 
jointly  or  does  each  one  own  a  particular  part  of  the  fence? 

16.  Define  and  give  an  example  of  a  way  of  necessity. 

17.  Define  and  give  an  example  of  a  way  of  convenience. 

18.  How  are  highways  ordinarily  established? 

19.  How  may  a  highway  be  established  by  proscription? 

20.  Into  what  classes  are  estates  divided  as  to  the  quantity  of 
interest  held? 

21.  What  is  a  freehold  estate? 

22.  From  what  is  the  term,  freehold,  derived? 

23.  Define  and  give  an  example  of  an  estate  in  fee  simple. 


COMMERCIAL  LAW  239 

24.  What  is  meant  by  entailing  an  estate? 

25.  What  was  the  reason  for  the  practice  of  entaiUng  estates? 

26.  To  what  extent  may  an  estate  be  entailed  in  this  country? 

27.  What  is  the  rule  against  perpetuities? 

28.  Define  and  give  an  example  of  a  life  estate. 

29.  WTiat  claims  do  life  estates  embrace? 

30.  Define  estate  by  the  courtesy. 

3L  Define  and  give  an  example  of  dower  estate. 

32.  Define  and  give  an  example  of  homestead  estate. 

33.  Define  and  give  an  example  of  an  estate  for  years. 

34.  Is  a  lease  for  two  months  an  estate  for  years? 

35.  May  a  holder  of  an  estate  for  years  transfer  it? 
36  What  is  meant  by  waste? 

37.  WTiat  is  the  general  rule  relating  to  waste? 

38.  Give  an  example  of  an  estate  at  will. 

39.  Distinguish  an  estate  at  will  from  an  estate  at  sufferance. 

40.  How  may  an  estate  at  will  be  terminated  ? 

4L  Define  and  give  an  example  of  an  estate  in  remainder. 

42.  Distinguish  vested  and  contingent  remainder. 

43.  Distinguish  estates  in  reversion  from  estates  in  remainder. 

44.  How  may  title  to  real  property  be  acquired  ? 

45.  Define  deed. 

46.  Define  deed  poll. 

47.  Define  indenture. 

48.  Wliat  are  the  formal  parts  of  a  deed  ? 

49.  ^\^lat  things  are  included  in  the  premises  of  a  deed? 

50.  Wliat  is  meant  by  the  habendum  and  redendum  clause  of 
a  deed? 

5L  Wliat  is  a  warranty  of  a  deed? 

52.  Wliat  are  the  general  warranties  of  a  deed? 

53.  What  things  are  included  in  the  conclusion  of  a  deed? 

54.  What  is  meant  by  the  acknowledgment  of  a  deed? 


COMMERCIAL  LAW 

PART  V 


MORTGAGES  OF  REAL  ESTATE 

305.  Mortgage  Defined.  By  the  common  law,  a  mortgage  was 
an  absolute  deed  of  conveyance,  by  the  terms  of  which  the  debtor 
was  entitled  to  receive  a  reconveyance  of  the  property  upon  payment 
of  the  debt  described  in  the  mortgage,  or  upon  performing  the  con- 
ditions for  which  the  mortgage  was  given.  For  example,  A  owes  B 
one  thousand  dollars,  A,  to  secure  the  debt,  gives  B  an  instrument 
of  conveyance  of  his  house  and  lot,  the  instrument  containing  a  pro- 
vision that  if  A  pays  B  one  thousand  dollars  (SI, 000.00)  on  or  before 
January  1st,  1911,  B  is  to  reconvey  the  house  and  lot  to  A.  The 
above  represents  a  mortgage  at  common  law.  As  explained  later, 
a  present  day  mortgage  is  somewhat  different. 

At  common  law,  the  creditor  had  possession  of  the  property 
from  the  time  the  mortgage  was  given,  unless  it  was  expressly  agreed 
that  the  debtor  was  to  remain  in  possession.  The  real  purpose  of  a 
mortgage  is  to  give  security  for  a  debt  or  obligation.  To  permit  a 
creditor  to  keep  the  mortgaged  property  upon  default  of  the  debtor 
to  pay  the  debt  when  due,  is  unjust  in  many  cases.  For  example, 
if  A  gives  a  mortgage  to  B  upon  property  worth  one  thousand  dol- 
lars, to  secure  a  debt  of  three  hundred  dollars,  and  A  defaults  in 
payment,  it  is  unjust  to  permit  B  to  keep  the  property.  Courts  of 
equity  have  for  a  long  time  regarded  this  transaction  as  a  mere  security 
for  a  debt,  and  not  an  absolute  transfer  of  title  to  property.  Courts 
of  equity  long  ago  permitted  the  debtor  to  file  a  petition  in  a  court 
of  equity  asking  that  the  property  be  reconveyed  to  him  upon  pay- 
ment of  the  debt,  and  damages  due  the  creditor.  Courts  of  equity 
recognize  this  right  of  the  debtor,  which  is  called  equity  of  redemption. 
At  the  present  time  mortgages  are,  in  form,  an  absolute  conveyance 
of  real  estate,  with  a  condition  that  the  title  is  to  revest  in  the  debtor, 
or  that  the  conveyance  is  to  be  void  and  of  no  efTect,  if  the  debtor 


242  COMMERCIAL  LAW 

pays  the  debt  or  performs  the  condition.  If  the  debtor  fails  to  per- 
form this  condition  at  the  time  stipulated,  he  is  still  able  to  enforce 
his  equity  of  redemption.  This,  in  effect,  makes  a  mortgage  of  real 
estate  a  mere  security  for  a  debt.  The  creditor  is  permitted  to  cut 
off  the  debtor's  right  of  redemption  by  foreclosure,  which  is  discussed 
under  a  separate  section. 

306.  Parties  to  a  Mortgage  Contract.  A  mortgage  of  real 
estate  is  a  contract.  Like  any  contract,  it  requires  competent  parties, 
a  consideration,  mutuality,  etc.  (See  Essentials  of  a  Contract,  chap- 
ter on  Contracts.)  The  party  conveying  the  real  estate  to  another  as 
security  for  the  debt  is  called  the  mortgagor,  the  party  to  whom  the 
mortgage  is  given  is  called  the  mortgagee. 

307.  Possession  of  Mortgaged  Property.  Originally  at  com- 
mon law,  the  mortgagee  was  entitled  to  the  possession  of  the  mort- 
gaged premises  as  soon  as  the  mortgage  was  given,  and  before  default 
of  the  mortgagor  to  pay  the  debt  described  in  the  mortgage.  At 
the  present  time,  the  mortgagor  is  entitled  to  possession  of  the  mort- 
gaged premises  until  after  default  of  payment  of  the  mortgage  debt. 
After  default,  the  mortgagee  may  take  possession  of  the  premises. 
Some  states  now  provide  by  statute,  that  the  mortgagor  shall  have 
possession  of  the  mortgaged  premises  until  he  defaults  in  payment  of 
the  mortgage  debt.  Independently  of  such  a  statute,  the  mortgagor 
has  the  right  to  possession  of  the  mortgaged  premises  before  default 
of  payment  of  the  mortgage  debt.  This  is  by  reason  of  the  fact  that 
the  law  regards  the  transaction  as  a  security  for  a  debt  rather  than 
an  absolute  transfer  of  title. 

Parties  are  permitted  to  enter  into  any  contract  they  choose  so 
long  as  the  provisions  are  legal.  Parties  to  a  mortgage  may  stipulate 
who  is  to  have  possession  before  default  or  payment  on  the  part  of 
the  mortgagor.  If  it  is  stipulated  that  the  mortgagee  is  to  have  pos- 
session, he  is  entitled  to  it  under  the  terms  of  the  mortgage  contract 
If  no  stipulation  is  made,  the  mortgagor  impliedly  is  given  the  right 
of  possession  before  default. 

308.  Deeds  as  Mortgages.  If  a  deed,  absolute  on  its  face,  is 
given  by  a  debtor  to  a  creditor  to  secure  a  debt,  it  will  be  treated  by 
a  court  of  equity  as  a  mortgage.  Equity  regards  the  substance  of 
things  rather  than  the  form.  (See  Courts  of  Equity  under  chapter 
on  Courts,  Remedies,  and  Procedure.)      Courts  of  equity  were  origi- 


COMMERCIAL  LAW  243 

nally  created  for  the  purpose  of  granting  justice  where  the  rules  of 
the  common  law  failed.  In  England,  they  were  called  courts  of 
chancery.  A  judge  sits  alone  as  a  court  of  equity,  without  the  aid 
of  a  jury.  When  there  is  no  remedy  at  law,  and  a  wrong  exists,  equity 
affords  a  remedy.  In  this  country,  the  same  court  frequently  sits  as 
a  court  of  equity  as  well  as  a  court  of  law.  In  the  case  of  deeds  abso- 
lute on  their  face,  if  it  was  the  intention  of  the  parties  that  the  con- 
veyance was  to  constitute  a  security  for  a  debt,  rather  than  a  sale, 
a  court  of  equity  will  permit  the  grantor  to  secure  a  return  of  the 
property  upon  payment  of  his  debt.  Equity  looks  at  the  substance 
of  the  transaction  disregarding  the  form.  If  mortgages  are  not  in 
proper  legal  form,  and  either  party  is  not  permitted  at  law  to  enforce 
his  right,  equity  will  enforce  the  transaction  according  to  the  inten- 
tion of  the  parties.  Informal  or  incomplete  mortgages  are  called 
equitable  mortgages. 

309.  The  Debt  Secured.  A  mortgage  is  a  contract,  and  like 
any  contract,  must  be  supported  by  a  consideration.  (See  Considera- 
tion, chapter  on  Contracts.)  The  consideration  of  a  mortgage  may 
be  anything  of  benefit  to  the  one  giving  the  mortgage,  or  any  detri- 
ment to  the  one  receiving  the  mortgage.  The  consideration  of  a 
mortgage  ordinarily  is  an  advancement  or  loan,  past  or  present,  made 
by  a  mortgagee  to  the  mortgagor.  That  is,  a  mortgage  is  given  as 
security  for  some  debt  or  obligation  in  favor  of  the  mortgagee.  This 
debt  is  usually  described  in  the  mortgage  as  a  promissory  note. 
Even  though  no  note  has  been  given,  if  the  amount  described  in  the 
mortgage  as  a  promissory  note  is  the  amount  of  the  debt,  or  if  any 
debt  exists,  the  mortgage  is  valid.  A  mortgage  may  be  given  to 
cover  future  advances,  or  for  a  pre-existing  indebtedness.  If  a 
mortgage  is  given  as  security  for  a  promissory  note,  it  will  secure  all 
renewals  of  the  note  as  well. 

310.  Essentials  of  a  Mortgage.  A  mortgage  is  an  instrument 
for  the  conveyance  of  land.  By  the  provisions  of  the  Statute  of 
Frauds,  such  instruments  must  be  in  writing  to  be  enforceable. 
(See  Statute  of  Frauds,  chapter  on  Contracts.)  The  states  provide 
by  statute  that  mortgages  must  be  recorded  to  be  efTective  as  against 
subsequent  innocent  purchasers,  mortgagees  or  creditors.  Mort- 
gages must  be  in  writing  for  the  purpose  of  recording,  as  well  as  to 
comply  with  the  Statute  of  Frauds.     When  a  mortgagee  takes  pos- 


244  COMMERCIAL  LAW 

session  of  the  mortgaged  premises,  this  is  sufficient  notice  to  creditors 
and  subsequent  purchasers  of  his  interests.  In  this  event  the  mort- 
gage need  not  be  reduced  to  writing  nor  recorded. 

Mortgages  are  usually  written  in  the  form  of  formal  deeds. 
(See  Form  of  Deeds,  chapter  on  Real  Property.)  Although  it  is 
good  business  practice  to  follow  these  well  recognized  forms  in  draw- 
ing mortgages,  an  informal  instrument  describing  the  parties  and  the 
property  mortgaged,  and  showing  an  intent  to  make  a  mortgage  is 
sufficient.  Some  states  by  statute  provide  a  short  statutory  form. 
This  form  may  be  used,  but  does  not  prevent  the  common  law  form 
from  being  used. 

A  mortgage  is  given  to  secure  a  debt  or  obligation.  This  debt 
or  obligation  should  be  set  forth  in  the  mortgage,  and  the  time  when 
it  is  to  be  paid  or  performed  should  be  set  forth.  The  mortgage 
should  also  contain  a  description  of  the  property  mortgaged.  A 
complete  and  accurate  description,  such  as  is  used  by  surveyors,  is 
the  best  form.  By  this  means,  a  person  can  locate  the  property 
directly  from  the  description  given  in  the  mortgage.  It  is  sufficient 
if  the  description  given  enables  a  person  to  locate  the  property  either 
by  reference  to  another  record  containing  a  description,  or  by  its 
own  terms.  A  surveyor's  description  is  better,  however.  A  mort- 
gage should  contain  the  names  of  the  grantor  and  the  grantee. 

The  mortgagor  is  entitled  to  his  equity  of  redemption.  That  is, 
he  is  entitled  to  the  right  to  file  a  petition  in  a  court  of  equity,  offering 
to  pay  the  mortgage  debt,  interest,  and  damages  to  the  mortgagee, 
and  asking  for  a  return  of  the  property.  This  may  be  done  at  any 
time  before  foreclosure  by  the  mortgagee.  Foreclosure  is  discussed 
under  a  separate  section. 

311.  Power  of  Sale  and  Delivery  in  Escrow.  If  a  mortgagor 
stipulates  in  the  mortgage  that  he  waives,  or  will  not  enforce  his 
equity  of  redemption,  the  law  does  not  permit  the  mortgagee  to  en- 
force such  a  stipulation.  It  is  regarded  as  against  public  policy,  and 
illegal.  ^Vhenever  there  is  a  mortgage,  there  is  an  equity  of  redemp- 
tion in  favor  of  the  mortgagor. 

Some  mortgages  contain  a  stipulation  that  in  case  the  mortgagor 
fails  to  pay  the  mortgage  debt  when  due,  the  mortgagee  may  sell  the 
property,  deduct  his  claim  costs  and  expenses,  and  return  the  balance 
to  the  mortgagor.     Such  mortgages  are  called  power  of  sale  morU 


COMIMERCIAL  LAW  245 

gages.  They  are  valid  and  enforceable.  The  mortgagor's  equity 
of  redemption  is  protected,  in  that  he  receives  the  balance  of  the  pro- 
ceeds of  the  sale  of  the  mortgaged  premises,  after  the  mortgage  debt 
and  expenses  are  paid.  The  sale,  under  a  power  of  sale  mortgage, 
must  be  public  and  bona  fide. 

A  mortgage  must  be  signed  by  the  mortgagor.  This  is  called 
in  law,  execution  of  the  mortgage.  The  mortgage  must  also  be 
attested.  This  means  that  the  signing  must  be  in  the  presence  of  a 
witness  or  witnesses.  This  requirement  is  a  statutory  one.  Some 
states  require  only  one  witness,  others  two.  If  a  mortgage  is  to  be 
recorded,  the  signature  of  the  mortgagor  must  be  acknowledged  before 
a  notary  public  or  officer  authorized  to  administer  oaths.  This  is 
called  achioidedgment.  It  means  that  the  mortgagor  acknowledges 
the  making  of  the  signature  in  the  presence  of  an  officer  authorized 
to  administer  oaths.  The  officer  writes  a  certificate  of  this  acknowl- 
edgment on  the  mortgage.  Acknowledgment  is  a  statutory  require- 
ment. A  mortgage  will  not  be  received  for  record  by  the  public 
recorder,  unless  it  has  been  acknowledged. 

A  mortgage  given  by  a  married  man  must  contain  a  waiver  of 
dower  by  the  mortgagor's  wife,  or  the  wife  will  have  a  dower  estate 
therein  if  her  husband  dies  before  she  dies.  The  mortgage  of  a  mar- 
ried man  should  contain  a  statement  that  the  wife  waives  her  dower 
interest,  and  the  wife  should  sign  the  mortgage  before  witnesses,  and 
acknowledge  her  signature.  A  mortgage,  like  any  written  contract,  does 
not  become  effective  until  delivered.  By  delivery  is  meant  giving  pos- 
session of  the  instrument  to  the  mortgagee  or  his  agent,  with  intent 
that  it  is  to  become  effective  from  that  date.  If  a  mortgage  or  writ- 
ten instrument  is  delivered  to  a  third  person  to  be  held  for  a  certain 
purpose  or  until  a  certain  time,  this  is  called  delivery  in  escrow. 

312.  What  Interest  in  Real  Estate  May  be  Mortgaged.  Any 
interest  in  real  estate  which  is  the  subject  of  transfer  or  sale  may  be 
mortgaged.  One  who  has  the  absolute  title,  called  Jcc  .simple  inter- 
est, in  real  estate  may  mortgage  it.  A  mortgage  is  not  regarded  as  a 
transfer  but  merely  as  a  security  for  a  debt  or  obligation.  The  mort- 
gagor retains  an  interest  called  his  equity  of  redemption.  For  all 
practical  purposes,  a  mortgage  of  real  estate  means  that  the  mort- 
gagee may  sell  the  property  mortgaged  upon  failure  of  the  mortgagor 
to  pay  the  mortgage  debt  when  due.     The  mortgagee  may  keep 


246  COMMERCIAL  LAW 

enough  of  the  proceeds  of  the  sale  to  satisfy  the  mortgage  debt.  The 
equity  of  redemption  of  a  mortgagor  and  the  remainder  must  be 
returned  to  the  mortgagor,  or  his  right  to  the  proceeds  of  the  sale  of 
mortgaged  premises,  after  the  mortgage  debt  is  paid,  is  an  interest 
which  in  turn  may  be  mortgaged. 

A  mortgagor  may  give  successive  mortgages  so  long  as  he  finds 
persons  willing  to  accept  them  as  security.  In  practice,  second  and 
third  mortgages  on  real  estate  are  common.  Not  only  may  real  estate 
be  mortgaged,  but  anything  permanently  connected  with  real  estate, 
such  as  crops,  trees,  houses,  and  buildings.  Articles  of  personal 
property  which  have  become  permanently  annexed  to  real  estate 
are  called  fixtures.  (See  Fixtures,  chapter  on  Real  Estate.)  If  title 
to  real  estate  has  been  obtained  by  fraud,  a  valid  mortgage  may  be 
given  to  one  who  has  no  notice  of  the  fraud.  The  principle  involved 
is  that  a  title  obtained  by  fraud  or  duress  is  voidable.  The  party 
defrauded  may  obtain  a  reconveyance  of  the  property  as  against 
the  party  practicing  the  fraud,  but  not  as  against  innocent  pur- 
chasers who  have  had  no  notice  of  the  fraud.  If,  however,  a  con- 
veyance is  attempted  by  means  of  a  forgery,  no  title  to  the  property 
passes  to  the  purchaser,  who  in  turn  can  convey  nothing  by  mort- 
gage or  otherwise.  Similarly,  a  party  who  has  conveyed  his  interest 
in  real  estate  absolutely,  by  deed  or  contract,  has  nothing  left  to  con- 
vey, and  cannot  give  a  mortgage.  An  interest  in  real  estate  less  than 
absolute  ownership,  as  a  life  interest,  or  a  mere  lease,  or  term  for 
years,  is  an  interest  which  may  be  mortgaged. 

313.  Recording  Mortgages.  To  be  effectual  against  creditors, 
subsequent  purchasers,  and  mortgagees,  most  of  the  states  require 
by  statute,  that  mortgages  be  recorded  with  the  public  recorder  of 
the  county  where  the  property  is  located.  These  statutory  provisions 
do  not  render  mortgages  inefifectual  as  between  original  parties.  A 
gives  a  mortgage  on  his  house  and  lot  to  B.  B  does  not  have  the 
mortgage  recorded.  If  A  fails  to  pay  the  mortgage  debt  when  due, 
B  may  foreclose.  As  against  A,  B's  mortgage  is  enforceable  without 
being  recorded.  If,  however,  A  gives  a  subsequent  mortgage  to  C, 
and  C  records  his  mortgage,  C's  mortgage  is  superior  to  B's.  If  A 
sells  the  property  to  D  after  mortgaging  it  to  B,  B  not  recording  the 
mortgage,  D,  upon  having  his  deed  recorded,' takes  the  title  free  of 
B's  mortgage.     If  A  gives  B  a  mortgage,  B  not  having  the  mortgage 


COMMERCIAL  LAW  247 

recorded,  and  E  obtains  a  judgment  against  A  and  levies  upon  the 
real  estate  mortgaged  to  B,  E  obtains  a  lien  superior  to  B's. 

The  statutes  of  a  few  states  provide  that  mortgages  become 
effective  from  the  time  they  are  left  with  the  recorder  for  record. 
The  recorder  stamps  on  the  mortgage  the  time  it  is  left  for  record, 
and  the  mortgage  becomes  effective  from  that  time.  Suppose  A  on 
the  second  of  February  gives  a  mortgage  on  his  house  and  lot  to  B, 
for  $500.00,  and  then  on  the  fifth  of  February  gives  a  mortgage  on  his 
house  and  lot  to  C  for  $500.00.  If  C  has  his  mortgage  recorded 
February  sixth,  and  B  has  his  mortgage  recorded  February  seventh, 
C*  mortgage  is  superior  to  B's.  In  the  few  states  where  a  mortgage 
does  not  become  effective  until  received  for  record,  the  one  first 
received  for  record  is  superior  to  others,  even  though  the  mortgagee 
first  leaving  his  mortgage  for  record  takes  his  mortgage  with  actual 
notice  of  the  prior  mortgage.  The  general  rule  is  that  one  who 
takes  a  mortgage  with  actual  notice  of  other  mortgages,  takes  subject 
to  such  mortgages. 

To  be  received  for  record,  a  mortgage  must  be  acknowledged. 
This  means  that  the  mortgagor  must  acknowledge  the  signature  to 
the  mortgage  before  a  notary  public  or  officer  authorized  to  administer 
oaths.  The  officer  makes  a  certificate  of  the  acknowledgment  on 
the  mortgage. 

314.  Transfer  of  Mortgages  and  Mortgaged  Premises.  "While, 
in  form,  a  mortgage  is  a  transfer  of  real  estate,  it  is  regarded  merely 
as  security  for  a  debt.  The  mortgagee  is  not  permitted  to  transfer 
title  to  the  real  estate.  He  is,  however,  permitted  to  transfer  the  in- 
terest which  he  possesses  in  the  mortgaged  premises.  Such  a  transfer 
is  called  an  assignment.  It  is  a  contract  of  sale  by  which  the  mort- 
gagee sells  his  interest  in  the  mortgage.  (See  Assignment  of  Con- 
tract, chapter  on  Contracts.)  For  example,  if  A  mortgages  his  farm 
to  B  as  security  for  a  one-thousand-dollar  promissory  note,  B  cannot 
convey  title  to  the  property  mortgaged,  to  C,  but  he  may  sell  his  in- 
terest in  the  mortgage  to  C.  The  mortgage  cannot  be  sold  separately 
from  the  debt  secured.  The  mortgage,  separated  from  the  debt, 
represents  nothing  of  value.  If,  in  the  example  above  given,  B  en- 
deavors to  sell  the  note  to  one  person,  and  the  mortgage  to  another, 
the  purchaser  of  the  mortgage  takes  nothing.  A  sale  of  the  debt 
secured  by  the  mortgage,  carries  with  it  the  mortgage  security,  unless 


248  COMMERCIAL  LAW 

it  is  expressly  agreed  that  the  debt  is  transferred  without  the  security 
of  the  mortgage. 

If  A  mortgages  his  farm  to  B  to  secure  a  promissory  note  for 
one  thousand  dollars,  and  B  sells  the  note  to  C,  C  takes  the  security 
of  the  mortgage  as  well  as  the  note,  unless  it  is  expressly  agreed  be- 
tween him  and  B  that  the  security  of  the  mortgage  is  not  transferred 
with  the  note.  After  B  sells  C  the  note,  B  cannot  cancel  the  mort- 
gage. The  mortgage  now  belongs  to  C.  If  A  mortgages  his  farm 
to  B  to  secure  two  promissory  notes  of  $500.00  each,  and  B  sells  one 
of  the  notes  to  C,  in  the  absence  of  an  agreement  to  the  contrary,  C 
has  one-half  interest  in  the  mortgage  as  security  for  his  note.  B 
may,  however,  expressly  stipulate  in  the  sale  of  his  note  to  C,  that  B 
is  to  retain  the  entire  mortgage  security  for  his  own  note. 

WTien  a  debt  secured  by  a  mortgage  is  assigned,  the  assignee 
should  inmiediately  notify  the  mortgagor  of  the  assignment,  in  order 
that  the  mortgagor  shall  pay  him,  and  not  the  assignor.  This  is 
the  safe  policy  to  follow,  although  technically,  the  mortgagor  before 
paying  the  mortgage  debt  should  be  sure  that  the  mortgagee  is  still  the 
owner  of  the  note,  debt,  or  other  obligation,  secured  by  the  mortgage. 

A  mortgagor  is  permitted  to  sell  his  interest  in  the  mortgaged 
premises  before  satisfying  the  mortgage.  He  may  sell  his  equity  of 
redemption,  or  he  may  sell  in  such  a  manner  that  the  purchaser  as- 
sumes the  mortgage.  If  the  mortgagor  sells  the  mortgaged  premises, 
the  purchaser  agreeing  to  assume  the  mortgage  as  between  the  mort- 
gagor and  the  purchaser,  the  purchaser  must  pay  the  mortgage. 
The  mortgagee,  however,  is  not  bound  by  this  agreement.  He  may 
disregard  it.  He  may  accept  the  benefit  of  it  if  he  chooses  and  sue 
the  purchaser  on  this  contract.  (See  Contract  for  the  Benefit  of 
Third  Persons,  chapter  on  Contracts.)  If,  however,  the  mortgagee 
agrees  to  accept  the  purchaser  of  the  mortgagor's  interest  as  the  debtor, 
the  original  mortgagor  is  relieved  thereby. 

315.  Satisfaction  of  Mortgages.  A  mortgage  is  given  as 
security  for  a  debt  or  obligation.  It  is  satisfied  by  payment  of  the 
debt,  or  fulfillment  of  the  obligation.  The  mortgage  debt  may  be 
paid  by  the  mortgagor  himself,  by  a  purchaser  of  the  mortgagor's 
interest,  by  a  subsequent  mortgagee,  or  by  any  one  having  an  interest 
in  the  real  estate  mortgaged.  If  anyone,  other  than  the  mortgagor, 
pays  the  mortgage  debt  to  protect  his  own  interest,  he  is  thereby  en- 


COMMERCIAL  LAW  249 

titled  to  the  benefit  of  the  mortgage.  This  is  called  subrogation.  If 
A  owes  B  $5,000.00,  and  gives  B  a  note  for  that  amount,  secured  by 
a  real  estate  mortgage  on  a  farm,  C  signing  the  note  as  surety  or  guar- 
antor, in  case  C  pays  the  note  upon  default  of  yl,  C  is  entitled  to  B\f 
benefit  in  the  mortgage.  Payment  of  a  mortgage  debt  may  be  made 
to  a  mortgagee,  himself,  his  assignee  of  the  mortgage  debt,  or  any 
agent  or  authorized  representative  of  the  mortgagee.  A  party  not 
having  an  interest  in  the  land  cannot  voluntarily  pay  a  mortgage 
debt,  and  claim  the  benefit  of  a  mortgage  by  subrogation.  A  party 
interested  in  the  land,  even  the  mortgagor,  himself,  cannot  compel 
the  mortgagee  to  accept  payment  before  the  mortgage  debt  is  due. 

Upon  payment  of  a  mortgage  debt,  the  title  to  the  mortgaged 
premises  by  this  act  becomes  absolute  in  the  mortgagor.  At  com- 
mon law,  if  the  mortgagor  paid  the  mortgage  debt  when  due,  the 
mortgagee  had  to  reconvey  by  deed  the  mortgaged  premises  to 
the  mortgagor  to  give  the  latter  title.  But  at  the  present  time,  a 
mortgage  is  not  regarded  as  a  conveyance  of  title,  but  merely  as  a 
security  for  a  debt,  the  title  vesting  absolutely  in  the  mortgagor  any 
time  he  pays  the  debt  before  the  actual  foreclosure  of  this  right  by 
the  mortgagee. 

When  the  mortgagor  pays  the  mortgage  debt,  he  is  entitled  to 
a  written  satisfaction  of  the  debt.  This  is  a  mere  -WTitten  statement 
that  the  mortgage  is  satisfied,  signed  by  the  mortgagee.  The  mort- 
gagor is  thus  enabled  to  have  the  mortgage  cancelled  of  record,  which 
gives  the  public  notice  that  the  mortgage  is  no  longer  effective.  The 
mortgagor  presents  his  written  statement  of  satisfaction  to  the  public 
recorder,  who  enters  it  in  his  record  of  the  mortgage. 

316.  Equity  of  Redemption.  A  mortgagor  does  not  lose  his 
interest  in  the  mortgaged  property  by  failure  to  pay  the  mortgage 
debt  when  due.  Courts  of  equity  regard  a  mortgage  as  a  security 
for  a  debt,  and  not  a  transfer  of  real  property.  Even  though  the 
mortgagor  fails  to  pay  the  mortgage  debt  when  due,  and  in  spite  of 
the  fact  that  the  mortgage  purports  to  be  a  transfer  of  real  estate, 
conditioned  only  on  the  payment  of  the  debt  described,  equity  refuses 
to  regard  the  transaction  as  a  sale,  and  permits  the  mortgagor  to 
recover  the  property  by  paying  the  debt,  interest,  and  expenses  con- 
nected with  the  mortgage,  at  any  time  before  the  statute  of  limita- 
tions cuts  him  ofT.     The  states  have  statutes  requiring  suits  of  differ- 


250  COMMERCIAL  LAW 

ent  kinds  to  be  brought  within  certain  periods.  These  statutes 
vary  somewhat  in  the  different  states.  Most  states  require  an  action 
by  which  a  mortgagor  enforces  his  equity  of  redemption,  to  be  brought 
in  about  twenty  or  twenty-one  years  after  the  debt  becomes  due. 
The  mortgagor  himself  or  anyone  to  whom  he  transfers,  or  who 
acquires  his  interest,  is  entitled  to  the  equity  of  redemption. 

If  A  mortgages  his  farm  to  B,  to  secure  a  promissory  note  of 
one  thousand  dollars  due  in  one  year,  A  does  not  lose  his  right  to  the 
property  by  failure  to  pay  the  note  when  due.  He  may  bring  a  suit 
in  equity  at  any  time,  usually  within  twenty-one  years,  after  the 
note  becomes  due,  offering  to  pay  the  mortgage  debt,  interest,  and 
costs,  and  asking  for  a  return  of  the  property.  Equity  now  gives 
the  mortgagee  a  right  to  cut  off  the  mortgagor's  right  of  redemption 
by  foreclosure.     This  is  discussed  in  the  following  section. 

317.  Foreclosure  of  Mortgages.  A  mortgagor  has  the  right 
to  redeem  the  property  at  any  time  within  the  statute  of  limitations, 
after  the  mortgage  debt  becomes  due.  The  mortgagee  does  not 
have  to  wait  the  pleasure  of  the  mortgagor  to  redeem  or  abandon 
the  right.  Equity  gives  the  mortgagee  the  right  to  cut  off  the  mort- 
gagor's equity  of  redemption  by  foreclosure.  By  foreclosure  is 
meant  the  mortgagee's  right  to  file  a  petition  in  a  court  of  equity 
asking  that  the  property  be  sold,  and  that  from  the  proceeds,  the 
amount  of  the  mortgage  debt  and  costs  first  be  paid,  and  that  the 
balance  be  paid  the  mortgagor.  The  court  orders  the  property 
advertised  and  sold,  and  the  proceeds  distributed  as  above  described. 

Some  mortgages  contain  a  stipulation  concerning  foreclosure. 
These  mortgages  are  called  power  of  sale  mortgages.  It  is  stipulated 
that  when  the  mortgagor  is  in  default  of  payment,  the  mortgagee  may 
advertise  and  sell  the  property,  deducting  from  the  proceeds  the 
mortgage  debt,  interest,  and  expenses,  and  paying  the  balance  to 
the  mortgagor.  These  power  of  sale  mortgages  are  enforceable. 
The  sale  must  be  free  from  fraud,  public,  and  the  mortgagee  cannot 
become  a  purchaser  unless  so  stipulated  in  the  mortgage,  or  so  pro- 
vided by  statute.  The  states  usually  provide  by  statute  a  method 
of  foreclosure.  These  statutes  frequently  provide  that  a  mortgagee 
may  enforce  his  mortgage,  and  obtain  a  judgment  against  the  mort- 
gagor on  the  mortgage  debt  in  the  same  action.  If  the  mortgaged 
premises  do  not  bring  enough  to  satisfy  the  judgment,  the  balance 


COMMERCIAL  LAW  251 

may  be  enforced  against  the  mortgagor  by  seizing  any  property 
subject  to  execution  that  he  possesses. 

TRUSTS 

318.  Defined  and  Classified.  In  a  popular  sense,  the  term, 
trust,  is  often  used  to  designate  combinations  of  capital  or  com- 
binations among  business  men  for  the  purpose  of  destroying  competi- 
tion, or  for  the  purpose  of  regulating  prices.  This  is  not  the  mean- 
ing of  the  term  as  used  in  this  chapter.  It  is  here  used  to  mean 
an  estate  of  some  kind  held  for  the  benefit  of  another.  A  trust 
has  been  defined  to  be  "An  obligation  upon  a  person,  arising  out 
of  a  confidence  reposed  in  him,  to  apply  property  faithfully  ac- 
cording to  such  confidence."  A,  by  will,  appoints  B  trustee  of  his 
farm,  for  the  benefit  of  C.  Upon  A's  death,  if  B  accepts  the  duty 
imposed  upon  him  by  the  will,  a  trust  is  thereby  created  in  which 
B  holds  the  legal  title  to  the  farm,  for  the  benefit  of  C. 

Trusts  are  sometimes  classified  as  general  and  special.  If 
the  property  is  conveyed  by  deed  or  will  to  another  to  be  held  in 
trust  for  a  third  person,  without  specifying  any  of  the  duties  of  the 
second  person,  it  is  said  to  be  a  general  or  simple  trust.  If,  however, 
the  duties  of  the  second  person  or  trustee  are  defined,  the  trust  is 
called  a  special  trust.  A  trust  for  the  benefit  of  an  individual  or 
individuals  is  called  a  private  trust,  while  one  for  the  benefit  of  a 
public  institution,  or  for  the  public,  is  a  public  trust.  If  A  gives 
his  property  to  B  to  care  for  the  poor  of  the  city  of  Chicago,  the  trust 
is  public.  As  to  their  method  of  creation,  trusts  are  usually  divided 
into  express,  implied,  resulting  and  constructive  trusts. 

319.  Parties  to  Trusts.  The  party  creating  a  trust  is  called 
the  grantor  or  settlor.  The  party  to  whom  the  title  to  the  property 
is  given  to  hold  for  the  benefit  of  another  is  called  the  trustee.  The 
party  for  whose  benefit  the  trust  is  created  is  called  the  cestui  que 
trust.  If  the  beneficiaries  are  more  than  one  in  number,  they  are 
termed  cestui  que  trust.  If  A  deeds  his  land  to  B  for  the  benefit 
of  C,  A  is  the  settlor,  B  is  the  trustee,  and  C  is  the  cestui  que  trust. 

320.  Who  May  be  Parties  to  a  Trust.  Persons  of  lawful  age, 
and  competent  to  make  contracts,  including  corporations,  may 
create  trusts.  Any  person  competent  to  make  contracts,  including 
corporations,    may   act   as    trustee.     Even   infants    (persons   under 


252  COMMERCIAL  LAW 

legal  age)  may  act  as  trustees  if  the  duties  require  the  exercise  of  no 
discretion.  An  infant  may  hold  the  legal  title  as  trustee,  and  if 
the  duties  require  the  exercise  of  discretion,  the  court  will  remove 
him  or  appoint  a  guardian  to  perform  his  duties.  Anyone  capable 
of  holding  the  legal  title  to  property  may  be  a  cestui  que  trust.  This 
includes  corporations,  aliens,  and,  in  case  of  charitable  trusts,  infants. 
Any  kind  of  property,  whether  real  or  personal,  may  be  given  in  trust. 
This  includes  lands,  chattel  property,  promissory  notes,  accounts, 
and  kindred  property  rights,  regardless  of  where  the  property  is 
located. 

321.  Express  Trusts.  An  express  trust  is  one  created  by  the 
express  written  or  oral  declaration  of  the  grantor.  If  A  gives  a  deed 
of  his  farm  to  B,  by  the  terms  of  which  B  is  to  hold  the  farm  in  trust 
for  C,  A,  the  grantor,  has  created  an  express  trust  in  favor  of  C,  B 
as  trustee  holds  the  legal  tide  to  the  farm,  and  C,  as  cestui  que  truM 
or  beneficiary,  holds  the  beneficial  or  equitable  interest.  A,  before 
giving  the  deed  of  trust,  was  the  absolute  owner  of  the  farm.  That 
is,  A  held  the  legal  title  and  the  equitable  interest  in  the  farm.  By 
creating  the  trust,  he  placed  the  legal  title  in  one  person  and  the 
equitable  or  beneficial  interest  in  another 

Originally,  in  England,  at  common  law,  trusts  could  be  created 
by  oral  declaration  as  well  as  by  written  instruments.  At  that  time, 
land  could  be  transferred  without  written  instruments.  The  seller 
took  the  buyer  on  to  the  land  to  be  conveyed,  and  in  the  presence 
of  witnesses  delivered  to  him  a  symbol  of  the  land,  such  as  a  piece 
of  turf  or  a  twig.  About  1676,  the  Statute  of  Frauds  was  passed 
by  the  English  Parliament,  requiring  among  other  things,  that  con- 
veyances of  lands,  including  the  creation  of  trusts  therein,  must  be 
by  written  instruments.  This  provision  of  the  Statute  of  Frauds 
has  been  re-enacted  by  most  of  the  states  of  this  country.  At  the 
present  time,  trusts  in  real  estate  must  generally  be  created  by  WTitten 
instrument.  Trusts  may  be  created  by  will  to  take  efifect  at  the 
grantor's  death.  Trusts  may  be  created  in  personal  property.  Ex- 
cept when  created  by  will,  trusts  in  personal  property  may  be  created 
by  oral  declaration  of  the  grantor.  A  grantor  may  create  a  trust 
voluntarily.  If  actually  carried  out,  or  if  the  grantor's  intention 
to  create  the  trust  is  expressed  as  final,  it  requires  no  consideration 
to  support  it      If  the  declaration  of  trust  amounts  to  a  mere  agree- 


COMMERCIAL  LAW  253 

ment  to  create  a  trust,  and  is  not  carried  out,  it  requires  a  considera- 
tion to  enable  the  beneficiary  to  compel  its  execution.  After  an  ex- 
press trust  is  completed,  it  cannot  be  revoked  by  mutual  agreement 
between  the  grantor  and  trustee  without  the  consent  of  the  cestui 
que  trust. 

The  most  common  forms  of  express  trusts  are  created  by  deed, 
by  will,  or  by  contract.  Any  declaration  of  the  grantor,  no  matter 
how  informal,  if  expressing  his  intention  to  create  a  trust,  is  sufficient 
to  create  a  trust.  A  trust  cannot  be  created  for  an  immoral  or 
illegal  purpose. 

322.  Implied  Trusts.  When  a  person  by  deed  or  will  does 
not  use  language  expressly  creating  a  trust,  but  uses  language  show- 
ing his  intention  to  create  a  trust,  one  will  be  implied.  Such  a  trust 
is  known  in  law  as  an  implied  trust,  as  distinguished  from  an  express 
trust.  If  A  devises  all  his  property  to  his  son,  B,  the  will  containing 
the  following  language:  "I  request  my  son,  B,  to  pay  his  cousin,  C, 
$10.00  per  month  during  his  life,"  this  language  is  held  to  create  a 
trust  in  favor  of  C,  wherein  B  is  trustee. 

323.  Resulting  Trusts.  One  party  may  so  conduct  himself, 
or  so  deal  with  another,  that  a  court  will  declare  the  transaction  to  be 
a  trust,  even  in  the  absence  of  any  express  declaration,  or  of  an 
intention  on  the  part  of  the  parties  to  create  a  trust.  Such  a  trust 
is  known  in  law  as  a  resulting  trust.  J,  to  avoid  paying  his  creditors, 
purchases  property  in  the  name  of  his  wife,  K.  /v  is  a  trustee  for 
her  husband,  J,  and  creditors  can  by  suit  in  equity  subject  J*s  in- 
terest in  the  property. 

If  yl  purchases  property,  and  takes  the  deed  in  the  name  of 
By  B  is  trustee  for  ^.  B  is  the  legal  owner,  and  A  is  the  beneficial 
or  equitable  owner.  If  a  third  person  purchases  the  property  from 
B,  without  notice  of  A's  rights,  and  for  value,  the  third  person  takes 
good  title  to  the  property  free  from  A^s  claim. 

In  this  country,  the  states  generally  require  by  statute,  that 
deeds  and  mortgages  of  real  estate  must  be  recorded.  If  an  equit- 
able owner  does  not  have  a  properly  recorded  WTitten  instrument 
showing  his  interest  in  the  real  estate  in  question,  thereby  giving 
future  purchasers  notice  of  his  interest,  he  cannot  complain  unless 
the  third  person  has  actual  notice  of  his  rights  or  purchases  without 
giving  a  valuable  consideration.     A  resulting  trust  is  not  created  by 


254  COMMERCIAL  LAW 

agreement  or  contract  to  that  effect,  but  is  created  by  the  trustee 
using  money  or  funds  of  the  cestui  que  tru^t  in  the  purchase  of  prop- 
erty in  his  own  name. 

324.  Constructive  Trusts.  If  one  person  is  in  a  confidential 
relation  to  another,  and  misappropriates  the  money  of  the  other, 
this  act  is  said  to  create  a  cunstrudive  trust,  in  which  the  defrauding 
party  is  trustee,  and  the  defrauded  party  is  beneficiary,  or  cestui  que 
trust.  A  constructive  trust  differs  from  a  resulting  trust  in  that  the 
former  involves  fraud  on  the  part  of  the  trustee,  exercised  on  the 
cestui  que  trust,  while  a  resulting  trust  never  involves  fraud  between 
the  trustee  and  cestui  que  trust,  although  created  for  the  purpose  of 
defrauding  third  persons. 

HA,  an  attorney,  is  employed  by  B  to  collect  a  note  of  $500.00, 
and  fraudulently  reports  a  collection  of  $300.00,  keeping  $200.00, 
a  constructive  trust  results,  in  which  A  is  trustee  for  B,  for  $200.00. 
If  A,  for  the  purpose  of  defrauding  his  creditors,  deposits  his  money 
in  bank  in  B^s  name,  a  resulting  trust  arises  in  which  B  is  trustee 
for  A,  and  A's  creditors  can  subject  the  property. 

Anyone  defrauding  another  by  duress,  by  taking  advantage  of 
old  age  or  of  mental  weakness,  or  by  fraud,  becomes  the  trustee  for 
the  wronged  party  in  the  amount  the  latter  has  lost. 

325.  Rights  and  Liabilities  of  Trustee.  A  trustee  of  an  express 
trust  need  not  accept  the  trust  against  his  will.  If  A  by  deed,  will, 
or  written  declaration,  names  B  as  trustee  of  certain  property  for  C, 
B  need  not  accept  unless  he  so  desires.  If  B  refuses  to  act  as  trustee, 
the  trust  does  not  fail  by  reason  thereof.  A  court  may  appoint  an- 
other trustee  or  may  itself  administer  the  trust.  After  accepting  a 
trust,  a  trustee  cannot  resign  without  the  consent  of  the  cestui.  He 
may  be  removed  by  the  court  for  misconduct,  or  he  may  transfer 
his  duties,  if  so  stipulated  in  the  instrument  creating  the  trust. 

In  England  during  the  reign  of  Henry  VIII,  a  statute  was  passed 
called  the  Statute  of  Uses,  declaring  that  real  property  given  to  one 
person  and  his  heirs  in  trust  for  another  and  his  heirs,  should  vest 
the  legal  title  in  the  trustee.  Thus,  if  A  gives  real  estate  to  B  and 
his  heirs  in  trust  for  C  and  his  heirs,  B  takes  the  legal  title.  The 
Statute  of  Uses  is  in  force  in  most  of  the  states  of  this  country.  It 
does  not  apply  to  personal  property,  and  if  the  trustee  is  given  some 
duties,  such  as  to  collect  rents,  or  to  do  anything  except  to  hold  the 


COMMERCIAL  LAW  255 

legal  title  as  trustee,  the  case  is  not  within  the  Statute  of  Uses,  and 
the  trust  will  be  carried  out. 

A  trustee  holds  the  legal  title  to  the  trust  estate.  Suits  against 
the  estate  must  be  brought  against  him  as  trustee,  and  suits  for  the 
protection  of  the  estate  must  be  brought  by  him  as  trustee.  A 
trustee  has  the  right  to  possession  of  all  personal  property  covered 
by  the  trust,  and  to  possession  of  the  real  property,  if  necessary  to 
execute  the  terms  of  his  trust.  A  trustee  must  protect  the  estate 
and  perform  his  duties  with  care,  or  be  liable  to  the  beneficiary  for 
any  damages  resulting.  He  is  not  permitted  to  make  any  profit  out 
of  his  oflSce.  Any  profit  made  by  him  through  his  connection  with 
the  trust  estate  belongs  to  the  beneficiacy. 

326.  Rights  and  Liabilities  of  Beneficiary.  A  cestui  que  trust 
has  the  right  to  receive  the  benefits  of  the  trust  estate  as  outlined  in 
the  instrument  creating  the  trust.  If  the  trustee  fails  properly  to 
perform  his  duties,  the  cestui  qu£  trust  may  bring  legal  action  to  have 
him  removed.  A  trustee  has  legal  title  to  the  trust  property,  and 
may  convey  good  title  to  one  who  purchases  for  value,  and  without 
notice  of  the  trust.  The  cestui  que  trust  can  follow  and  regain  trust 
funds  or  property,  if  the  latter  are  conveyed  to  persons  not  bona  fide 
purchasers.  ^ 

LANDLORD  AND  TENANT 

327.  In  General.  The  term,  landlord  and  tenant,  is  applied 
to  the  relation  existing  between  one  who  obtains  the  right  to  the  pos- 
session of  the  real  property  of  another,  under  a  contract  by  the  terms 
of  which  the  title  or  ultimate  right  to  possession,  or  at  least  some  in- 
terest in  the  property,  remains  in  the  grantor.  The  relation  existing 
between  landlord  and  tenant  is  contractual.  Like  all  contracts, 
there  must  be  a  consideration,  competent  parties,  and  legality  of 
purpose. 

The  contract  by  which  one  party  becomes  a  tenant  is  called 
a  lease.  The  party  granting  a  lease  is  called  the  landlord.  The 
owner  to  whom  the  lease  is  given  is  called  the  tenant  or  lessee.  A 
lease  of  property  is  not  a  sale.  By  a  lease  of  real  property,  the  lessor 
grants  but  a  portion  of  what  he  possesses.  By  making  a  sale  of 
real  property,  the  grantor  transfers  his  entire  interest.  If  a  tenant 
transfers  his  entire  interest  in  the  lease,  it  is  a  sale,  and  is  usually 


256  COMIVIERCIAL  LAW 

called  an  assignment,  if  a  tenant  sublets  a  portion  of  his  interest 
in  the  lease,  he,  himself,  becomes  a  landlord,  and  the  sublessee  be- 
comes a  tenant. 

328.  Rights  of  a  Tenant.  The  form  and  contents  of  a  lease 
are  discussed  under  a  separate  section.  Parties  to  a  lease  may  agree 
to  anv  terras  they  choose,  if  the  terms  are  legal.  In  the  absence  of 
exp^*ess  stipulations  in  a  lease,  many  things  are  implied.  A  tenant  is 
entitled  to  the  possession  and  use  of  the  premises  leased,  from  the 
time  mentioned  in  the  lease  for  it  to  take  effect.  By  possession  is 
meant  the  right  to  take  actual  possession  of  the  premises  without 
being  prevented  by  one  having  a  right  superior  to  that  of  the  tenant. 

A  tenant  is  permitted  to  rent  any  premises  he  chooses.  A  land- 
lord, on  the  other  hand,  may  lease  to  a  tenant  any  premises  he  pos- 
sesses. There  is  no  implied  warranty  on  the  part  of  the  landlord 
that  premises  leased  are  in  good  condition,  or  that  they  are  fit  for 
any  particular  purpose.  The  tenant  makes  his  own  bargain,  and, 
as  in  the  case  of  making  a  purchase  of  goods,  or  in  making  any  con- 
tract, he  must  take  care  of  his  own  interests.  The  tenant  may 
stipulate  in  the  lease  that  the  premises  are  to  be  in  a  certain  condi- 
tion, that  they  are  adapted  to  a  certain  purpose.  In  this  event,  the 
tenant  is  not  obliged  to  accept  the  premises  if  they  do  not  comply 
with  the  terms  of  the  lease,  or  he  may  bring  an  action  for  damages 
against  the  landlord  for  not  complying  with  the  terms  of  the  lease. 
In  the  absence  of  any  express  stipulation  as  to  the  condition  of  the 
premises,  or  their  suitableness  for  the  purpose  for  which  they  are 
to  be  used,  the  law  implies  nothing. 

A  landlord  is  not  permitted  to  defraud  a  tenant.  He  cannot 
conceal  or  misrepresent  material  facts  relating  to  the  lease.  If 
there  is  a  misrepresentation  of  a  material  fact  by  the  landlord,  which 
is  relied  upon  by  the  tenant  to  the  latter's  injury,  the  tenant  has  been 
defrauded.  He  may  refuse  to  accept  the  property,  or  he  may  repudiate 
the  lease  as  soon  as  he  discovers  the  fraud.  A  tenant  impliedly  has 
the  right  to  quiet  enjoyment  of  the  premises  leased.  The  landlord 
must  not  disturb  the  tenant's  right  to  quiet  possession.  If  the  land- 
lord, himself,  or  one  who  legally  claims  a  right  to  possession  of  the 
premises  disturbs  the  tenant's  possession,  the  latter  may  sue  the  land- 
lord for  damages.  If  a  mere  trespasser  or  one  who  \^Tongfully  claims 
the  right,  disturbs  the  possession  or  quiet  enjoyment  of  the  tenant, 


COMMERCIAL  LAW  257 

the  landlord  is  not  liable.  The  acts  of  strangers  are  beyond  his 
control.  The  tenant  may  use  the  premises  for  the  purposes  stipulated 
in  the  lease.  In  the  absence  of  express  stipulation,  he  may  use  the 
premises  for  the  purpose  and  in  the  manner  in  which  the  property 
leased  is  customarily  used. 

329.  Taxes,  Repairs,  and  Insurance.  The  general  rule  is,  that 
in  the  absence  of  express  stipulation  in  the  lease  to  the  contrary,  all 
taxes  are  to  be  paid  by  the  landlord.  Even  though  the  lease  pro- 
vides that  the  tenant  is  to  pay  all  taxes,  this  does  not  include  special 
assessments,  such  as  assessments  for  city  paving  and  sewers.  Water 
rent  is  not  included  in  the  general  term,  taxes.  The  landlord  is 
obliged  to  pay  all  taxes  on  the  property  unless  the  tenant  expressly 
assumes  them.  In  the  absence  of  any  express  stipulation,  the  tenant 
must  pay  water-rent.  There  is  no  implied  duty  on  the  part  of  the 
tenant  to  insure  the  property  leased. 

A  tenant  is,  in  the  absence  of  any  express  stipulation,  required 
to  keep  the  property  in  repair.  He  is  not  liable  for  ordinary  wear 
and  tear  of  the  property,  but  must  make  ordinary  repairs  at  his  own 
expense.  If  the  property  is  destroyed  by  fire  without  the  fault  of 
the  tenant,  the  tenant  is  not  liable  for  the  loss.  He  is  not  obliged 
to  rebuild  the  property  destroyed.  The  lease  is  ended  by  the  de- 
struction of  the  property  by  fire,  and  the  tenant  is  not  obliged  to  pay 
further  rent.  The  above  is  the  rule  fixed  by  statute  in  most  states. 
The  common  law  rule  was  that  a  tenant  was  not  relieved  from  pay- 
ing rent  by  the  destruction  of  the  building  by  fire. 

330.  Liability  for  Injuries  Arising  from  Condition  of  Leased 
Premises.  In  the  absence  of  any  stipulation  in  the  lease  relative 
to  the  condition  of  the  premises  leased,  the  tenant  is  presumed  to 
make  the  lease  on  his  own  judgment.  There  is  no  implied  duty 
on  the  part  of  the  landlord  to  deliver  the  premises  in  any  particular 
condition.  This  rule  is  subject  to  the  limitation  that  a  landlord  is 
not  permitted  to  deliver  possession  of  premises  containing  latent 
defects  of  such  a  character  as  would  be  liable  to  cause  injury  to  a 
tenant.  If  injury  results  from  such  latent  defects,  the  landlord  is 
liable  in  damages  to  the  tenant.  As  a  rule,  however,  the  tenant 
takes  the  premises  as  they  are,  and  if  injury  results  to  himself  by  reason 
of  apparent  defects  in  the  premises,  he  has  no  right  of  action  against 
the  landlord.     The  tenant  has  control  of  the  premises.     If  persons 


258  COMMERCIAL  LAW 

are  injured  by  reason  of  accummulations  of  snow  or  ice  on  the  walks, 
the  tenant,  and  not  the  landlord,  is  liable  therefor. 

331.  Rent.  The  compensation  given  by  a  tenant  to  a  land- 
lord for  the  use  of  leased  premises  is  called  rent.  A  tenant  may  be- 
come liable  for  rent  without  any  express  agreement  to  that  effect. 
If  one  person,  with  the  consent  of  another,  occupies  the  premises  of 
the  latter  as  a  tenant,  he  is  liable  to  pay  the  reasonable  value  of  such 
occupancy,  as  rent.  This  obligation  is  implied  from  the  relation  of 
landlord  and  tenant  existing  between  the  parties. 

Ordinarily,  the  matter  of  rent  is  expressly  agreed  upon  and, 
until  the  tenant  is  evicted,  his  lease  surrendered,  or  he  is  released, 
he  is  obliged  to  pay  the  landlord  rent.  The  tenant's  liability  to  pay 
rent  does  not  necessarily  depend  upon  actual  occupancy  of  the  leased 
premises.  He  may  rent  the  premises  for  the  use  of  another,  or  he 
may,  without  excuse,  refuse  to  accept  possession  of  the  premises. 
In  either  event,  he  is  liable  for  rent.  If  the  lease  expressly  stipulates 
that  the  premises  are  in  a  certain  condition  as  to  plumbing,  etc., 
the  tenant  may  refuse  to  accept  the  possession  if  the  conditions  are 
not  fulfilled.  If,  on  the  other  hand,  the  tenant  leases  premises, 
nothing  being  said  about  their  condition,  the  tenant  is  presumed  to 
rely  upon  his  own  judgment,  and  the  fact  that  the  premises  are  un- 
inhabitable by  reason  of  defective  plumbing,  by  reason  of  unhealth- 
ful  conditions,  or  for  any  reason,  does  not  release  him  from  his  con- 
tract. He  is  liable  to  pay  the  rent  agreed  upon.  The  landlord  is 
not  permitted  to  defraud  the  tenant.  He  cannot  mislead  the  tenant 
by  false  or  fraudulent  representations.  Fraud  enables  a  tenant  to 
avoid  a  lease. 

If  a  tenant  refuses  to  accept  possession  of  premises  leased,  or 
abandons  the  premises  without  excuse,  he  is  still  liable  for  the  rent 
for  the  balance  of  the  term.  If  he  surrenders  the  lease,  and  the  land- 
lord consents  to  the  surrender,  the  tenant  is  relieved  from  further 
liability.  But  a  voluntary  abandonment  by  the  tenant,  not  con- 
sented to  by  the  landlord,  does  not  relieve  the  tenant  from  liability 
to  pay  rent.  If  a  tenant  abandons  the  premises  leased,  the  landlord 
may  permit  the  premises  to  remain  vacant  and  compel  the  tenant  to 
pay  the  balance  of  the  rent  when  it  is  due  under  the  lease.  The 
landlord  may,  on  the  other  hand,  accept  the  premises,  and  cancel 
the  remainder  of  the  lease.    Again,  the  landlord  may  take  possession 


COMMERCL\L  LAW  259 

of  the  premises  and  relet  them  for  the  benefit  of  the  tenant,  notify- 
ing the  tenant  of  his  intention.  He  may  collect  any  deficiency  in 
the  rent  from  the  original  tenant.  For  example,  if  A  rents  B's 
house  for  one  year  for  $300.00  and  at  the  expiration  of  six  months 
A  abandons  the  premises,  B  may  relet  the  premises  to  C  for  A's 
benefit.  If  B  relets  for  A's  benefit,  he  must  obtain  the  best  terms 
possible.  If  he  obtains  only  $100.00  rent  from  C  for  the  balance  of 
the  term,  he  can  collect  $50.00  from  A. 

332.  Distress.  At  common  law,  a  landlord  had  the  right  to 
take  possession  of  the  personal  property  of  a  tenant  who  was  in 
arrears  for  rent,  and  hold  the  personal  property  until  the  rent  was 
paid.  This  remedy  is  known  as  distress.  WTien  a  landlord  makes 
use  of  this  remedy  he  is  said  to  distrain  for  rent.  A  landlord  can- 
not deprive  the  tenant  of  possession,  and  then  distrain  for  rent.  It 
is  not  an  action  against  the  tenant  personally,  as  an  action  for  debt. 
It  is  a  mere  right  of  a  landlord  to  take  possession  of  the  tenant's 
personal  property  after  rent  is  due,  and  while  the  tenant  is  still  in 
possession  of  the  leased  property  as  tenant.  The  landlord  may 
retain  possession  of  his  property  as  security  for  the  rent.  At  com- 
mon law,  a  landlord  could  not  sell  the  property,  but  could  hold  it  as 
security  for  the  rent. 

At  the  present  time,  the  right  to  distrain  for  rent  is  not  recognized 
by  many  states.  WTiere  recognized,  it  is  regulated  largely  by  statute. 
The  landlord  is  usually  required  to  give  bond,  and  file  an  aflBdavit 
with  a  court  to  the  effect  that  the  rent  of  a  certain  amount  is  justly 
due.  The  property  is  then  seized  by  an  oflBcer  of  the  court,  and 
upon  final  termination  of  the  case,  may  be  sold,  and  the  proceeds 
applied  to  the  payment  of  the  rent.  This  action  is  now  treated  in 
the  nature  of  an  attachment.  (See  Attachment,  chapter  on  Courts 
and  Legal  Remedies.)  The  remedies  of  a  landlord  commonly 
recognized  at  the  present  time  are  actions  for  rent,  and  actions  to 
recover  possession  of  the  premises.  These  remedies  are  discussed 
under  a  separate  section. 

S33.  Leases.  Lease  is  the  term  applied  to  the  agreement  by 
which  one  person  becomes  a  tenant,  and  another  a  landlord.  Leases 
are  usually  in  the  form  of  formal  written  instruments  in  which  the 
rights  and  duties  of  the  parties  are  quite  fully  set  forth.  No  par- 
ticular form  of  language  is  required  to  make  a  valid  lease.    If  the 


260  COMMERCIAL  LAW 

agreement  shows  an  intention  on  the  part  of  the  parties  to  create 
the  relation  of  landlord  and  tenant,  it  is  sufficient  to  constitute  a 
lease.  Parties  may  make  oral  leases  covering  short  periods  of  time. 
Most  of  the  states  provide  by  statute  that  leases  beyond  certain  periods 
must  be  in  writing  to  be  enforceable.  This  period  varies  in  the 
different  states.  Some  require  leases  in  excess  of  three  years  to  be 
in  writing;  others  fix  the  limit  at  one  year.  Some  of  the  statutes 
which  do  not  specially  require  leases  to  be  in  writing,  make  them 
void  as  against  purchasers  or  incumbrances  if  not  recorded.  Such 
statutes  in  effect  require  the  lease  to  be  in  wTiting.  A  lease  does  not 
require  a  seal.  By  statute,  most  states  require  leases  to  be  witnessed, 
usually  by  two  witnesses,  and  acknowledged  before  a  notary  public. 
Witnessing  is  called  attesting,  or  attestation.  By  acknowledgment 
is  meant  an  admission  of  the  signature  by  the  parties  to  a  lease  before 
a  notary  public.  The  notary  writes  his  certificate  upon  the  lease, 
stating  that  the  parties  acknowledged  the  signature  in  his  presence. 
The  notary  signs  and  seals  the  certificate  of  acknowledgment.  The 
states  generally  require  by  statute  that  leases  beyond  a  certain  time, 
usually  one  or  more  years,  be  recorded  with  the  public  recorder  of 
the  county  where  the  property  leased  is  located,  to  be  effectual  as 
against  subsequent  purchasers  or  incumbrances. 

Certain  requisites  are  recognized  in  formal  lease.  The  names 
and  description  of  the  parties,  the  terms  of  the  lease,  the  description 
of  the  property,  the  signing,  delivery,  and  acceptance  of  the  lease,  and 
the  witnessing  and  acknowledging  are  regarded  as  essential  features. 

Covenants  are  express  or  implied  terms  of  a  lease.  If  parties 
expressly  agree  to  do  certain  things  enumerated  and  set  forth  in  the 
lease,  the  covenant  is  said  to  be  express.  The  law  implies  certain 
obligations  on  the  part  of  the  parties  to  a  lease.  There  is  an  implied 
covenant  on  the  part  of  the  tenant  to  pay  rent,  and  to  make  all  ordi- 
nary repairs  subject  to  the  reasonable  wear  and  tear  of  the  premises. 
The  landlord  impliedly  consents  to  give  the  tenant  quiet  enjoyment, 
and  to  pay  taxes  and  assessments. 

334.  Transfer  of  Leases.  A  landlord  may  transfer  his  interest 
in  a  lease.  A  tenant  may,  unless  the  lease  stipulates  otherwise, 
transfer  his  interest  in  a  lease.  A  transfer  of  an  interest  or  right  in 
which  a  third  person,  not  a  party  to  the  transfer,  has  an  interest  is 
usually  called  an   assignment.     For  example,   A   owes  B  $100.00. 


COMMERCIAL  LAW  261 

B  may  assign  his  claim  to  C.  By  notifying  A  of  the  assignment, 
A  is  obliged  to  pay  C,  instead  of  B.  ,  Any  defense  that  A  has  against 
B  is  available  against  C.  As  a  rule,  partial  interests  cannot  be 
assigned  so  as  to  be  binding  upon  the  obligor,  without  the  latter's 
consent.  If  A  owes  B  $100.00  B  cannot  assign  $10.00  of  this  claim 
to  ten  different  parties.  This  would  compel  A  to  pay  ten  different 
persons,  while  the  original  obligation  bound  him  to  pay  but  one. 
A  may  have  a  counter  claim  amounting  to  $50.00.  To  obtain  the 
benefit  of  this  counter  claim,  he  would  have  to  set  it  up  in  five  differ- 
ent suits,  whereas  if  the  claim  were  sued  by  the  original  owner, 
or  by  one  owner  he  would  have  to  make  a  defense  in  but  one  suit. 

An  assignment  may  be  made  orally,  if  not  in  conflict  with  the 
provisions  of  the  Statute  of  Frauds.  It  may  be  made  by  written 
contract.  No  particular  language  is  required  to  make  a  valid  assign- 
ment. Any  words  expressing  the  intention  of  one  party  to  make  an 
assignment,  accepted  by  the  one  to  whom  the  assignment  is  to  be 
made,  is  sufficient.  A  landlord  may  assign  a  lease.  Upon  receipt 
of  notice  of  the  assignment  from  the  landlord  or  the  assignee,  the 
tenant  must  pay  to  the  assignee  the  rent  subsequently  coming  due. 
If  an  assignment  is  made  by  a  landlord,  and  no  notice  is  given  the 
tenant,  the  latter  discharges  his  liability  under  the  lease  by  paying 
the  original  landlord.  Originally  at  common  law,  a  landlord  could 
not  assign  his  rights  without  the  consent  of  the  tenant.  The  tenant 
could  not  be  compelled  to  recognize  a  new  landlord.  Recognition 
of  a  new  landlord  was  called  attornment.  A  tenant  may  assign  his 
interest  in  a  lease  if  the  lease  does  not  expressly  provide  otherwise. 
This  does  not  relieve  the  tenant  from  liability  under  the  lease,  even 
though  the  landlord  consents  to  the  assignment,  and  accepts  rent 
from  the  assignee.  The  original  tenant  is  a  surety  for  the  rent. 
After  an  assignment  of  a  lease  by  the  tenant,  the  landlord,  if  he  does 
not  expressly  release  the  original  tenant,  may  collect  the  rent  from 
either  party. 

335.  Leases  for  Years.  A  lease  for  years  is  a  lease  for  a  definite 
and  ascertained  period  of  time.  If  A  rents  B's  farm  for  five  years 
commencing  June  1,  1910,  the  lease  is  for  years.  If  A  leases  B's 
house  for  a  year,  a  month,  or  a  week,  to  commence  on  a  certain  date, 
the  time  of  the  ledse  is  definite  and  ascertained  and  constitutes  a 
lease  for  years.     If  A  rents  B's  house  for  a  year  commencing  June 


262  COIVITMERCIAL  LAW 

23,  1910,  at  $25.00  per  month,  the  rent  to  be  monthly  in  advance, 
the  lease  is  one  for  years.  The  fact  that  the  rent  is  to  be  paid  in 
installments  does  not  render  the  lease  one  from  month  to  month. 

A  lease  is  regarded  as  personal  property  and,  while  it  is  an  in- 
terest in  real  property,  it  is  usually  called  a  chattel  real,  and  is  treated 
as  personal  property.  When  the  owner  of  a  lease  dies,  the  lease  i. 
personal  property  in  the  hands  of  the  executor  or  administrator 
of  the  owner,  and  does  not  descend  to  the  heirs  of  the  owner  as  real 
property.  In  some  states,  long  time  leases,  such  as  leases  for  ninety- 
nine  years,  are  by  statute  made  real  property. 

The  practical  distinction  between  leases  for  years  and  leases  from 
month  to  month,  is  that  in  the  former,  the  lease  ends  when  the  time 
covered  by  it  expires.  In  a  lease  from  month  to  month,  a  new  lease 
is  created  by  implication,  if  a  tenant  is  permitted  to  hold  over.  This 
question  is  discussed  more  at  length  under  the  section,  Tenancies 
from  Year  to  Year. 

336.  Subletting.  Some  states  by  statute  refuse  to  permit  a 
tenant  to  sublet  any  portion  of  his  lease,  without  the  consent  of  the 
landlord.  A  landlord  may  stipulate  in  his  lease  that  a  tenant  shall 
not  sublet  any  portion  of  the  premises.  In  the  absence  of  statutory 
provisions,  or  stipulations  in  the  lease,  a  tenant  may  sublet  the  leased 
premises.  A  transfer  by  a  tenant  of  an  interest  in  the  leased  premises 
may  be  an  assignment,  or  it  may  be  a  sublease.  An  assignment  is  a 
transfer  by  a  tenant  of  his  entire  interest  in  the  premises.  If  A  rents 
B's  farm  for  five  years,  and  sells  his  lease  for  five  years  to  C,  the 
transfer  is  an  assignment.  A  transfer  of  only  a  portion  of  a  tenant's 
interest  is  a  sublease.  If  A  rents  B's  farm  for  five  years,  and  leases 
the  farm  for  three  years  to  C,  the  transfer  is  a  sublease.  If  A  leases 
the  farm  to  C  for  five  years,  the  transaction  is  an  assignment.  An 
assignment  is  a  transfer  of  the  tenant's  entire  interest  in  the  leased 
premises.  A  sublease  is  a  transfer  of  a  part  of  a  tenant's  interest  in 
the  leased  premises. 

A  tenant  may  mortgage  his  interest  in  the  leased  premises.  A 
creditor  of  a  tenant  may  levy  upon  the  lease  in  satisfaction  of  a  judg- 
ment, the  same  as  upon  any  article  of  personal  property. 

The  purpose  of  the  statute  and  stipulations  in  a  lease,  forbidding 
a  tenant  to  sublet  the  leased  premises,  is  for  the  protection  of  the 
original  lessor.     A  subtenant  is  not  permitted  to  avoid  a  lease  on  the 


COMMERCIAL  LAW  208 

ground  of  such  a  statutory  provision,  or  by  reason  of  such  a  stipula- 
tion  in  a  lease.  For  example,  if  A  rents  B's  farm  for  five  years,  and 
the  lease  contains  a  stipulation  that  A  cannot  sublet,  if  A  sublets  the 
farm  for  three  years  to  C,  C  cannot  avoid  the  obligation  to  A  by  reason 
of  the  stipulation  in  the  lease.  The  stipulation  is  a  privilege  in  favor 
of  B.  It  may  be  exercised  by  B  if  he  chooses  to  avail  himself  of  the 
privilege.  He  may  waive  the  privilege,  or  refuse  or  neglect  to  exer- 
cise his  right.  Neither  C  nor  anyone  else  can  avail  himself  of  this 
privilege. 

It  is  sometimes  quite  difficult  to  tell  just  what  constitutes  a 
subletting  in  violation  of  a  statutory  provision  or  a  provision  in  the 
lease.  Mere  privileges  granted  to  others  do  not  constitute  sublet- 
tings.  Permission  granted  a  neighbor  to  use  a  barn  for  a  short 
period,  or  taking  roomers  by  the  week,  has  been  held  not  to  consti- 
tute a  subletting. 

If  a  tenant  in  violation  of  his  lease  sublets  a  part  of  the  premises, 
the  original  lessor  may  eject  the  sublessee,  and  sue  the  tenant  for 
damage  for  breach  of  contract. 

If  a  tenant  exercise  his  right  of  subletting  a  part  of  the  premises, 
he  is  not  thereby  relieved  from  his  responsibility  to  pay  rent  under 
the  lease.  Even  though  the  landlord  agrees  to  accept  rent  from  the 
sublessee,  and  apply  the  same  on  the  obligation  of  the  original  lessee, 
this  does  not  relieve  the  original  tenant  from  his  obligation  to  pay 
rent.  For  example,  if  A  rents  B's  house  and  lot  for  three  years  for 
$25.00  per  month,  payable  monthly  in  advance,  and  B  agrees  to 
accept  the  rent  from  C,  and  does  accept  payments  from  C,  this  does 
not  relieve  A  from  liability  to  pay  B  the  rent.  A  is  a  surety,  and  his 
obligation  to  pay  the  rent  to  B  is  the  same  as  the  obligation  of  C. 
If  B  expressly  agrees  to  relieve  A  and  to  accept  C  in  place  of  ^,  he 
can  no  longer  hold  A. 

337.  Tenancies  at  Will  and  at  Sufferance.  A  lease  may  be 
entered  into,  the  terms  of  which  may  be  terminated  at  the  will  of 
either  party.  It  is  for  an  indefinite  period.  Such  a  lease  creates  a 
tenancy  at  will.  (See  Estates  at  Will,  chapter  on  Real  Property.) 
Tenancies  at  will  are  uncommon.  The  usual  tenancies  are  tenancies 
for  years  and  tenancies  from  year  to  year.  If  A  permits  B  to  take 
possession  of,  and  to  occupy  his  house  under  an  agreement  that 
either  he  or  B  may  terminate  the  lease  at  the  desire  of  either  party, 


l'(i4  COMMERCIAL  LAW 

the  tenancy  is  one  at  will.  B  may  agree  to  pay  rent  at  the  rate  of 
$10.00  per  week,  $40.00  per  month  or  $500.00  a  year,  or  at  any  rate, 
without  affecting  the  estate  at  will.  If  the  estate  is  for  an  indefinite 
period,  but  is  terminable  at  the  wish  of  either  party,  no  matter  what 
the  arrangement  for  paying  the  rent,  it  is  an  estate  at  will,  as  dis- 
tinguished from  an  estate  for  years,  and  an  estate  from  year  to  year. 

It  is  sometimes  held  that  a  person  who  holds  over  with 
the  consent  of  the  landlord  after  the  termination  of  a  lease  for  a 
definite  period,  called  an  estate  for  years,  is  a  tenant  at  will.  For 
example,  if  A  rents  B's  house  for  one  year,  and  at  the  expiration  of 
the  year,  A  with  B^s  consent  retains  possession,  .4  is  a  tenant  at  will. 
The  tenancy  may  be  terminated  at  the  desire  of  either  party,  and 
upon  notice  by  either  party.  In  most  jurisdictions,  however,  this 
constitutes  A  a  tenant  from  year  to  year.    (See  following  section.) 

A  tenancy  at  sufferance  is  created  by  a  tenant  unlawfully  retain- 
ing possession  of  the  premises  after  the  termination  of  his  lease,  with- 
out the  consent  of  the  landlord.  If  A  rents  B's  house  for  one  year, 
and  at  the  expiration  of  the  year  A,  without  B's  consent  retains 
possession  of  the  house,  he  is  a  tenant  at  sufferance.  He  is  a  tres- 
passer, and  may  be  ejected  by  B.  Tenancies  at  w^ill  and  at  sufferance 
are  estates  in  land.  They  are  also  discussed  under  the  chapter  on 
Real  Property. 

338.  Tenancies  from  Year  to  Year.  A  tenancy  may  be  created 
for  a  definite  period  of  time  to  continue  for  similar  periods  unless 
terminated  by  notice  of  either  party.  Such  a  tenancy  is  called  a 
tenancy  Jor  years.  The  tenancy  may  involve  any  definite  period 
with  the  understanding  that  it  is  to  continue  for  similar  periods  if 
not  terminated  by  notice  of  the  landlord  or  tenant.  While  the  estate 
is  called  an  estate  from  year  to  year,  or  a  tenancy  from  year  to  year, 
it  may  be  for  a  week,  a  month,  a  year,  or  a  series  of  years,  or  for  any 
definite  period.  If  A  rents  B's  house  for  one  year,  the  rent  to  be 
paid  at  the  rate  of  $30.00  per  month,  payable  monthly  in  advance, 
the  lease  to  continue  for  yearly  periods  unless  either  A  or  B  notifies 
the  other  to  the  contrary,  the  tenancy  is  from  year  to  year.  If,  at 
the  expiration  of  the  year,  A  retains  possession  of  the  premises, 
having  received  no  notice  from  B  to  leave,  A  has  a  lease  for  another 
year  under  the  same  terms,  and  so  on.  for  succeeding  years.  The 
period  may  be  a  week,  or  a  month,  as  well  as  a  year.     Sometimes 


COMMERCIAL  LAW  205 

leases  are  spoken  of  as  leases  from  month  to  month,  or  from  week  to 
week,  in  case  the  lease  is  to  continue  for  a  month,  or  a  week.  The 
same  principle  is  involved  as  in  leases  from  year  to  year.  If  the  tenant 
holds  over  after  the  expiration  of  the  week  or  month,  he  has  a  lease 
for  a  similar  period  at  the  same  terms. 

A  tenancy  for  years  may  be  created  by  express  or  by  implied 
contract.  It  is  sometimes  difficult  to  tell  whether  a  tenancy  is  for 
years,  from  year  to  year,  or  at  will.  If  a  lease  specifies  that  it  is  to 
cover  a  definite  period  only,  it  is  a  lease  for  years,  and  terminates 
at  the  expiration  of  that  period.  If  the  lease  stipulates  that  it  is  to 
cover  a  definite  period,  and  continue  for  similar  periods  unless  either 
party  terminates  it  by  notice  to  the  other,  it  is  a  lease  from  year  to 
year.  If  the  lease  stipulates  that  it  can  be  terminated  at  the  will  of 
either  party,  it  is  a  lease  at  will.  \Mien  the  lease  is  oral,  or  created 
by  implication,  the  intention  of  the  parties  must  determine  the  na- 
ture of  the  lease. 

Some  difiiculty  arises  in  determining  whether  a  lease  is  one  at 
will,  or  from  year  to  year  when  a  tenant  for  years  is  permitted  to 
hold  over  with  the  consent  of  his  landlord.  For  example,  if  A  rents 
B's  farm  for  one  year,  and  is  permitted  by  B  to  remain  in  possession 
after  the  expiration  of  the  year,  in  theory,  -4  is  a  mere  tenant  at  will, 
and  can  be  ejected  at  the  will  of  B.  This  is  the  law  in  a  few  juris- 
dictions. Most  jurisdictions,  however,  hold  that  A,  when  permitted 
to  hold  over  by  B's  consent,  becomes  a  tenant  from  year  to  year. 

339.  Termination  of  Leases.  A  lease  for  years  is  terminated 
by  expiration  of  the  period  covered  by  the  lease.  The  lease  may  con- 
tain covenants,  breach  of  which  may  by  stipulation  constitute  a 
ground  of  forfeiture.  For  example,  a  lease  may  contain  a  stipulation 
that  the  landlord  may  declare  a  forfeiture  in  case  the  tenant  fails  to 
pay  the  rent  when  it  is  due.  If  the  tenant  commits  a  breach  of  this 
or  any  other  covenant  made  by  special  stipulation,  a  ground  of 
forfeiture,  the  landlord  may  by  notice  declare  the  lease  forfeited. 
This  renders  the  balance  of  the  lease  void.  Leases  for  years,  definite 
periods  of  time,  require  no  notice  to  terminate.  Leases  at  will, 
and  from  year  to  year  require  notice  on  the  part  of  the  party  seeking 
their  termination  to  be  given  to  the  other  party.  For  example,  sup- 
pose A  rents  B's  house  for  one  year,  to  continue  for  similar  periods  if 
agreeable  to  both  parties.    To  terminate  the  lease  at  the  end  of  the 


2(i0  COMMERCIAL  LAW 

year,  B  must  notify  A  to  quit  the  premises  at  the  expiration  of  the 
year.  If  A,  on  the  other  hand,  desires  to  terminate  the  lease  at  the 
expiration  of  a  year,  he  must  notify  B  previous  to  the  expiration  of 
the  year,  of  his  intention  to  terminate  the  lease  at  the  expiration  of 
the  year.  If  A  holds  over  without  notice  to  B,  or  without  B's  con- 
sent, A  has  a  lease  for  another  year  at  the  same  terms  as  before. 

To  terminate  a  lease  from  year  to  year  or  at  will,  the  party  seek- 
ing the  termination  of  the  lease  must  notify  the  other  party  of  his 
intention  to  terminate  the  lease.  The  states  generally  provide  by 
statute  the  time  and  manner  of  giving  such  notice.  In  general,  the 
notice  must  be  in  writing  and  must  be  served  on  the  interested 
parties  or  their  agents  a  reasonable  time  before  the  expiration  of 
the  period  of  the  lease. 

A  lease  may  be  terminated  by  a  subsequent  agreement  between 
the  parties.  This  is  commonly  known  as  a  surrender.  A  surrender 
is  a  release  of  possession  of  the  premises  by  the  tenant,  and  an  accept- 
ance by  the  landlord.  A  mere  abandonment  of  possession  by  a 
tenant  without  the  express  or  implied  acceptance  or  assent  of  the 
landlord  is  not  a  surrender.  Such  an  abandonment  might  constitute 
a  breach  of  contract  on  the  part  of  the  tenant,  but  it  requires  the 
assent  of  the  landlord  to  terminate  the  lease.  If  A  rents  a  farm  for 
three  years  at  S500.00  a  year,  and  at  the  expiration  of  two  years 
agrees  to  pay  B  $100.00  to  cancel  the  lease,  and  B  accepts,  the  trans- 
action constitutes  a  surrender,  and  terminates  the  lease.  If  A  merely 
abandons  the  premises  without  the  consent  of  B,  the  lease  still  exists. 
B  can  collect  the  rent  for  the  remaining  period  covered  by  the  lease. 
If  A  abandons  the  premises,  and  notifies  B  that  he  will  not  carry 
out  the  lease,  B  may  refuse  to  accept  the  breach,  permit  the  premises 
to  remain  vacant,  and  collect  the  rent  from  B.  B  may  accept  A's 
breach  of  the  contract,  and  terminate  the  lease,  or  he  may  take 
possession  of  the  premises,  and  relet  them  for  A's  benefit,  notifying 
A  that  he  takes  possession  for  A's  benefit,  and  not  for  his  own.  In 
this  event,  B  must  use  reasonable  diligence  in  obtaining  the  highest 
rent  possible,  and  if  he  is  obliged  to  rent  for  a  less  amount  than  A 
was  to  pay,  B  can  collect  the  difference  from  A. 

340.  Liability  of  Parties  to  a  Lease  for  Breach.  If  the  land- 
lord fails  to  fulfill  the  conditions  of  the  lease,  he  is  liable  in  damages 
to  the  tenant.     The  damages  are  the  difference  between  the  rent 


COMMERCIAL  LAW  267 

paid  under  the  lease,  and  the  market  value  of  the  premises  furnished. 
For  example,  if  A  rents  his  house  and  lot  to  B  for  one  year  at  $25.00 
per  month,  and  agrees  to  redecorate  the  house,  but  fails  to  do  so,  A 
may  recover  from  B  the  difference  between  $300,000,  the  rent  paid 
under  the  lease,  and  the  market  rental  of  the  house  undecorated. 
If  a  tenant  abandons  the  lease,  the  landlord  may  recover  from  him 
the  deficiency  between  the  rental  named  in  the  lease,  and  the  rental 
he  is  able  to  obtain  for  the  balance  of  the  time  covered  by  the  lease. 

For  example,  if  A  rents  B's  farm  for  three  years  at  $500.00  a 
year,  and  at  the  expiration  of  two  years,  A  abandons  the  lease,  if 
B  is  able  to  obtain  but  $300.00  for  the  remaining  year  covered  by 
the  lease,  he  can  recover  $200.00  and  expenses  from  A. 

A  suit  for  damages  is  not  the  only  remedy  the  landlord  has  against 
a  tenant  for  the  latter's  abandonment  of  the  premises.  The  land- 
lord may  refuse  to  accept  the  breach  on  the  part  of  the  tenant,  let 
the  premises  remain  vacant,  and  collect  the  rent  under  the  lease. 

The  landlord  may  enter  the  premises  for  the  purpose  of  prevent- 
ing loss  or  destruction  of  the  premises  without  accepting  the  breach. 
The  landlord  may  accept  and  cancel  the  remaining  portion  of  the 
lease,  or  he  may  again  lease  the  premises  for  the  benefit  of  the  tenant, 
and  collect  the  deficiency  in  the  rent  from  the  tenant.  This  question 
is  also  discussed  in  the  previous  section. 

341.  Actions  for  Recovery  of  Rent  and  Possession  of  Leased 
Premises.  A  landlord  may  sue  and  recover  judgment  by  bringing 
an  ordinary  action  for  debt  when  rent  or  any  installment  is  due. 
If  A  rents  B's  house  for  one  year  at  the  rate  of  $25.00  per  month, 
payable  at  the  end  of  each  month,  and  fails  to  pay  any  installment, 
B  may  sue  him.  The  judgment  may  be  satisfied  out  of  any  property 
A  may  have.  If  married,  A,  by  statute  in  most  jurisdictions,  is 
entitled  to  a  certain  amount  of  exempt  property. 

If  the  landlord  has  failed  to  perform  all  of  the  terms  and  con- 
ditions of  the  lease,  A  may  bring  a  counteraction  against  B  when 
sued  by  B  for  rent.  For  example,  if  B  has  failed  to  repair  the  house 
according  to  the  terms  of  the  lease,  A  may  counterclaim  for  damages 
when  sued  by  B  for  the  rent. 

When  the  period  of  the  lease  expires,  the  landlord  is  entitled 
;:o  possession  of  the  premises.  At  common  law,  he  was  entitled  to 
use  the  force  necessary  to  recover  possession.     He  is  not  permitted 


2(1S  COMMERCIAL  LA^^■ 

to  commit  a  breach  of  the  pubHc  peace  in  obtaining  possession.  Most 
of  the  states  provide  statutory  methods  for  obtaining  possession.  A 
complaint  is  filed  with  a  court  and  an  officer  of  the  court  ejects  the 
tenant  by  order  of  court.  Non-payment  of  rent  does  not  entitle 
the  landlord  to  terminate  the  lease,  unless  the  lease  expressly  so 
provides.  When  the  lease  is  forfeited  according  to  its  provisions, 
the  landlord  is  entitled  to  take  possession. 

TRADE=MARKS  AND  NAMES 

342.  Trade=Marks  in  General.  Persons  are  permitted  to  place 
marks  on  goods  manufactured  or  sold  by  them,  which  indicate  their 
origin  or  ownership.  By  this  means,  they  are  able  to  obtain  the 
benefit  of  any  superiority  which  their  goods  have  over  goods  of  other 
manufacturers  or  sellers.  These  marks  placed  on  goods  by  owners 
or  manufacturers  are  called  trade-marks.  A  court  has  defined  a 
trade-mark  to  be  "A  word,  symbol,  figure,  form  or  device,  or  a  com- 
bination thereof  adopted  or  devised  and  used  by  a  manfacturer  or 
seller  of  goods  to  designate  the  origin  or  ownership  of  the  goods,  and 
used  by  him  to  distinguish  the  goods  from  those  sold  or  manu- 
factured by  others." 

A  manufacturer  or  seller  of  an  article  is  not  permitted  to  appro- 
priate as  a  trade-mark  a  name  commonly  used  to  describe  the  article. 
Flour  is  manufactured  and  sold  by  many  persons.  Anyone  has  the 
right  to  manufacture  and  sell  flour  by  that  name.  No  one  is  per- 
mitted to  appropriate  to  himself  as  a  trade-mark  the  name  Flour. 
A  person  may,  however,  apply  an  arbitrary  term,  not  describing  the 
thing  produced,  for  the  purpose  of  designating  his  brand  of  flour  as 
distinguished  from  other  brands  of  flour.  While  a  manufacturer 
of  flour  is  not  permitted  to  appropriate  as  a  trade-mark  to  be  used 
on  flour  the  name  Flour,  he  may  be  permitted  to  use  the  term  Ideal. 
The  person  first  adopting  the  name  Ideal  as  a  trade-mark  in  the  sale 
of  flour,  acquires  a  property  right  in  the  name.  The  law  will  pro- 
tect him  in  the  use  of  this  name  in  connection  with  the  sale  and  manu- 
facture of  flour. 

Any  arbitrary  name,  sign,  mark,  symbol,  letter  or  number  used 
for  the  purpose  of  designating  the  origin  or  ownership  of  goods  may 
be  appropriated  as  a  trade-mark  by  the  person  first  adopting  and 
continuing  its  use.     A  person  is  not  permitted  to  adopt  as  a  trade- 


COMMERCIAL  LAW  200 

mark  anything  which  indicates  the  grade  or  ingredients,  or  which 
is  descriptive  of  the  article  sold  or  manufactured.  The  reason  for 
this  rule  is  that  otherwise  a  person  adopting  the  name  would  have  a 
monopoly  on  the  production  of  such  articles.  Crack-Proof  Rubber 
Goods,  as  applied  to  rubber  goods;  A\  Honey,  as  applied  to  honey, 
are  terms  descriptive  of  quality  of  goods  and  cannot  be  appropriated. 

A  proper  name  of  a  person  is  not  the  subject  of  a  valid  trade- 
mark. Persons  of  the  same  name  are  permitted  ordinarily  to  use 
their  name  in  the  manufacture  of  goods  of  the  same  nature.  A 
party  is  not  permitted,  however,  to  manufacture  or  seH  his  goods  as 
the  goods  of  another.  He  may  not  be  permitted  to  use  his  own 
name  in  the  sale  of  certain  goods  if  another  has  long  made  and  sold 
goods  under  the  same  name,  and  if  purchasers  are  defrauded  thereby, 
or  if  confusion  results.  This  is  not  by  reason  of  a  person  having  a 
trade-mark  in  his  own  name,  but  by  reason  of  unfair  trade.  This 
is  discussed  under  the  section  on  Unfair  Trade. 

343.  Trade=Marks  (Continued).  A  name  of  a  place  or  locality 
cannot  be  appropriated  as  a  trade-mark.  Any  person  is  permitted 
to  use  the  name  of  a  place  or  locality  to  designate  the  origin  of  the 
goods  and  it  is  the  common  property  of  all  as  much  as  any  descriptive 
name.  A  geographical  name  cannot  be  appropriated  as  a  trade- 
mark. A  common  example  of  this  principle  is  the  use  of  the  term, 
Lackawanna.  This  is  the  name  of  a  district  in  Pennsylvania.  A 
coal  company  endeavored  to  appropriate  the  name,  but  was  not  per- 
mitted to  use  it  as  a  trade-mark.  Others,  mining  coal  in  the  Lacka- 
wanna district  have  an  equal  right  to  designate  their  coal  by  the 
same  name.  Any  fanciful  or  arbitrary  name  not  describing  the 
article,  may,  however,  be  adopted  as  a  trade-mark.  A  person  first 
using  such  an  arbitrary  mark  in  the  manufacture  or  sale  of  a  par- 
ticular class  of  goods  acquires  a  trade-mark.  He  may  use  the  mark 
without  any  intention  of  acquiring  a  trade-mark  therein.  If  an- 
other person  attempts  to  use  the  mark,  no  matter  if  without  intent 
to  defraud,  he  may  be  enjoined  from  its  use.  The  owner  of  a  trade- 
mark has  no  greater  right  than  any  other  person  to  use  the  trade- 
mark on  classes  of  goods  different  from  the  class  on  which  it  has  been 
acquired.  A  trade-mark  used  on  flour  may  also  be  used  on  stoves 
by  another  person.  This  principle  is  subject  to  the  limitations  that 
one  person  is  not  permitted  to  deceive  purchasers  in  leading  them 


270  COMMERCIAL  LAW 

to  believe  that  thoy  arc  purchasing  the  goods  of  another.  This 
question  is  discussed  under  the  section  on  Unjair  Trade. 

A  trade-mark  is  acquired  by  the  person  first  using  it  in  connec- 
tion with  the  sale  or  manufacture  of  goods.  It  is  not  necessary  that 
it  be  adopted  with  the  intention  of  being  used  as  a  trade-mark. 
A  trade-mark  may  be  lost  by  discontinuance.  A  trade-mark  will 
not  be  allowed  on  an  article  which  it  is  against  public  policy  to  manu- 
facture. An  example  of  this  principle  is  adulterated  food  or  medicine. 
A  trade-mark  which  does  not  indicate  that  the  goods  manufactured 
or  sold  are  the  result  of  the  personal  skill  of  a  particular  person, 
may  be  sold  with  the  business  in  connection  with  which  the  trade- 
mark is  used. 

344.  Trade  Names.  A  person  is  permitted  to  use  a  name  other 
than  his  own  for  the  purpose  of  trade.  For  example,  John  Smith 
may  use  the  name  The  John  Smith  Co.,  The  Eureka  Co.,  The  L.  X. 
Co.,  or  any  arbitrary  or  fanciful  name  he  may  choose,  so  long  as  it 
does  not  conflict  with  the  rights  of  others.  Such  names  are  called 
trade  names.  Their  adoption  and  use  are  governed  by  the  same  legal 
principles  as  trade-marks.  Trade  names,  however,  are  applied  to 
a  business,  while  trade-marks  are  brands  applied  to  articles  of  manu- 
facture or  sale.  As  in  the  use  of  trade-marks,  a  person  is  not  pro- 
tected in  the  use  of  trade  names  which  describe  the  article  manu- 
factured or  sold.  The  use  of  the  name,  Cleveland  Fertilizer  Co. 
by  John  Smith,  does  not  prevent  others  from  using  the  same  name. 
The  law  does  not  permit  one  party  to  monopolize  the  use  of  the  term 
fertilizer;  neither  does  it  permit  him  to  monopolize  the  geographical 
term,  Cleveland.  The  party  first  adopting  a  trade  name  other  than 
a  descriptive  geographical,  individual,  or  proper  name,  acquires  the 
right  to  use  it  as  a  trade  name. 

While  a  person  cannot  acquire  such  a  right  in  a  geographical 
or  descriptive  name,  he  may,  by  long  use  of  it,  acquire  the  right 
to  prevent  others  from  using  it  in  such  a  manner  as  to  deceive  pur- 
chasers. A  person  is  not  permitted  to  sell  his  goods  as  the  goods  of 
another.  This  right  to  prevent  others  from  using  a  name  which 
deceives  the  public  is  not  by  reason  of  any  trade  name  acquired,  but 
by  reason  of  a  person  unfairly  making  others  believe  they  were  pur- 
chasing the  goods  of  one  person,  when,  in  reality,  they  are  purchasing 
the  goods  of  others. 


COMMERCIAL  LAW  271 

345.  Unfair  Trade.  A  trade-mark,  or  a  trade  name  cannot 
be  descriptive  of  the  articles  sold  or  manufactured.  Neither  can  a 
proper  name  or  a  geographical  name  be  appropriated  to  a  trade- 
mark or  name.  To  enable  a  person  to  acquire  a  trade-mark  or 
trade  name,  a  mark  or  name  must  be  adopted  which  in  no  way  de- 
scribes the  article  manufactured  or  sold.  It  must  be  one  that  is  not 
taken  from  the  place  where  the  goods  are  manufactured  or  sold,  or 
from  the  name  of  the  inventor  or  manufacturer.  It  must  be  an 
arbitrary  or  fanciful  name  or  mark.  A  manufacturer  of  flour  may 
use  as  a  trade-mark  the  name  Beauty  Flour,  but  not  Minnesota  Flour, 
or  Pure  Flour.  A  party  may  use  as  a  trade-mark  for  men's  collars 
the  picture  af  a  lion,  but  not  the  word  linen.  When  a  trade-mark 
or  a  trade  name  has  once  been  used  as  such,  the  owner,  unless  he 
loses  or  transfers  the  right,  acquires  the  sole  right  to  its  use,  and  may 
compel  others  to  cease  using  it,  regardless  of  actual  damages  or  con- 
fusion. At  the  present  time,  the  courts  recognize  a  principle  known 
as  unfair  trade.  Even  though  a  person  has  adopted  a  geographical 
name,  or  a  name  descriptive  of  the  articles  manufactured  or  sold 
as  a  trade  name,  he  is  permitted  to  enjoin  others  from  the  use  of  this 
name,  if  the  use  of  the  same  enables  the  latter  to  sell  his  goods  as  the 
goods  of  the  former.  A  person  cannot  use  the  name  Cleveland 
Fertilizer  Co.,  so  as  to  acquire  a  trade  name  therein.  But  if  the  name 
Cleveland  Fertilizer  Co.,  is  used  by  a  person  so  long  and  so  exten- 
sively as  to  acquire  for  its  owner  a  broad  reputation  as  a  manufacturer 
of  an  excellent  quality  of  fertilizer,  another  who  adopts  the  name 
may  be  enjoined  from  its  use,  if  purchasers  are  deceived  thereby. 
This  is  on  the  ground  of  vmfair  trade. 

346.  Unfair  Trade  (Continued).  The  same  principle  applies 
in  the  use  of  individual  names.  A  person  may  not  acquire  a  trade- 
mark in  his  own  or  in  any  individual  or  proper  name,  since  others 
have  the  right  to  the  use  of  their  own  name.  But  a  person  may 
acquire  such  a  reputation  as  a  manufacturer  of  a  particular  article, 
that  if  others  of  the  same  name  are  permitted  to  use  their  name  in 
the  same  connection  without  distinguishing  features,  the  public  will 
be  deceived  in  making  purchases.  For  the  purpose  of  protecting 
the  public  from  being  deceived,  the  courts  sometimes  enjoin  persons 
from  the  use  of  their  own  name  in  connection  with  the  manufacture 
and  sale  of  certain  articles.     For  example,  Thomas  Edison  has  ac- 


272  COMMERCIAL  LAW 

quired  fame  as  an  inventor  and  manufacturer  of  Edison  Batteries. 
A  person  by  the  name  of  Edison  would  not  be  permitted  to  manu- 
facture and  sell  electric  batteries  under  the  name  of  Edison  Electric 
Batteries,  for  the  reason  that  the  public  would  be  deceived  thereby. 
This  would  be  what  is  known  as  unfair  trade.  The  same  principle 
applies  to  geographical  names.  A  geographical,  individual,  proper, 
or  descriptive  name  cannot  be  used  as  a  trade  name,  or  a  trade-mark, 
but  they  can  be  so  used  as  to  prevent  others  from  using  them,  by 
reason  of  violating  the  law  of  unfair  trade. 

347.  Registration  of  Trade=  Marks.  In  1906  the  United  States 
Congress  passed  the  present  statute  relating  to  the  registration  of 
trade-marks.  The  act  provides  that  the  owner  of  a  trade-mark 
used  in  commerce  with  foreign  nations,  the  several  states,  or  the 
Indian  tribes  may  register  said  trade-marks  by  filing  the  same  with 
the  Commissioner  of  Patents .  A  trade-mark  is  acquired  in  the  same 
manner  as  at  common  law.  The  United  States  act  does  not  change 
the  method  of  acquiring  trade-marks,  nor  does  it  designate  what  con- 
stitutes trade-marks.  It  simply  permits  a  person  to  register  a  trade- 
mark already  acquired.  In  case  of  dispute,  the  owner  has  the  ad- 
vantage of  a  public  record  of  his  claim,  and  until  he  has  lost  his  right 
in  the  trade-mark  to  some  one  who  proves  to  have  a  better  right, 
the  registration  is  'prima  facie  evidence  of  ownership. 

Before  registering  a  trade-mark,  the  owner  is  required  to  file 
with  the  Commissioner  of  Patents  at  Washington,  an  application 
showing  the  nature  of  the  trade-mark,  on  what  goods  used,  and  when 
acquired.  A  fee  of  $10.00  is  required.  The  owner  must  file  a 
verified  statement  that  he  is  the  owner  of  the  trade-mark  sought  to 
be  filed.  Trade-marks  which  consist  of  the  name  of  an  individual, 
firm,  or  corporation,  or  words  descriptive  of  the  articles  manufactured 
or  sold,  a  geographical  term,  or  a  photograph  of  any  living  person, 
except  with  such  person's  consent,  shall  not  be  registered  as  trade- 
marks. When  such  application  is  filed,  if  the  Commissioner  of 
Patents  finds  that  it  is  proper  to  register  the  same  as  a  trade-mark, 
he  publishes  the  mark  in  the  official  gazette.  Anyone  may  oppose 
the  registration  by  filing  objections  within  twenty  days  after  said 
publication.  If  no  objection  is  filed,  the  trade-mark  is  registered, 
and  a  certificate  of  registration  is  furnished  the  applicant. 

If  objection  to  the  registration  of  a  trade-mark  is  made,  the 


COMMERCIAL  LAW  273 

applicant  is  notified  by  the  Commissioner  of  Patents.  If  the  trade- 
mark interferes  with  another,  or  is  descriptive  of  the  article  to  which 
it  is  to  be  applied,  the  commissioner  will  refuse  to  register  it.  A 
person  whose  application  for  registration  of  a  trade-mark  has  been 
refused  by  the  Commissioner  of  Patents  may  appeal  from  the  decision 
of  the  Commissioner  of  Patents  by  filing  applications  of  appeal  wuth 
the  Court  of  Appeals  of  the  District  of  Columbia. 

Registered  trade-marks  may  be  assigned  in  connection  with 
the  good  will  of  the  business  in  which  the  trade-mark  is  used.  Notice 
of  such  assignment  must  be  filed  with  the  Commissioner  of  Patents 
within  three  months  from  the  time  the  assignment  is  made,  to  ren- 
der it  valid  as  against  other  innocent  purchasers.  Certificates  of 
registration  shall  be  effective  for  twenty  years,  and  may  be  renewed 
for  like  periods  upon  payment  of  the  registration  fee. 

After  a  trade-mark  has  been  registered,  anyone  who  considers 
himself  injured  by  said  trade-mark  may  file  complaint  with  the 
Commissioner  of  Patents,  and  if  the  latter  determines  that  there  is 
an  infringement,  or  that  someone  has  a  prior  right  to  the  trade-mark, 
the  registration  may  be  cancelled.  Notice  of  registration  of  a  trade- 
mark is  given  the  public  by  publishing  the  words,  Registered  U.  S. 
Patent  Office,  with  the  trade-mark. 

Most  of  the  states  have  statutes  making  it  a  crime  falsely  to  use 
the  trade-mark  or  brand  of  another  company.  The  use  of  labels 
by  trade  unions  is  protected  in  this  manner  in  several  states. 

WILLS 

348.  Will  Defined.  A  will  has  been  defined  to  be  a  "disposition 
of  real  property  to  take  effect  after  the  death  of  the  testator."  Origi- 
nally, the  term  vnll  applied  only  to  dispositions  of  real  property,  and 
the  term  testament  applied  to  dispositions  of  personal  property.  At 
present,  the  terms  ^vill  and  testament  are  not  uncommonly  used. 
But  the  original  limitation  of  the  term,  will,  is  no  longer  commonly 
recognized.  The  term,  will,  is  now  used  to  describe  a  disposition 
of  personal  as  well  as  real  property  to  take  eflFect  at  the  maker's 
death. 

349.  Names  of  Parties  and  Terms  Commonly  Used  in  a  Will. 
The  person  who  makes  a  will  is  called  the  testator  or  devisor.  The 
term  testator  is  more  commonlv  used  than  the  term  devisor  to  desig- 


274  COMMERCIAL  LAW 

nate  the  maker  of  a  will.  The  term  devise  is  used  to  designate  the 
giving  of  real  property.  If  A  desires  to  give  a  farm  to  B  by  will, 
the  language  used  in  the  will  is,  "I,  A,  devise  to  B  my  farm."  Tech- 
nically, the  term  devise  means  the  giving  by  will  of  real  estate,  but 
it  is  commonly  used  to  designate  the  giving  by  will  of  personal  prop- 
erty as  well.  The  term  bequeath  is  used  to  designate  the  giving  of 
personal  property  by  will.  If  yl  desires  to  give  by  will  a  watch  to  B, 
he  uses  the  language,  'T,  A  bequeath  to  B  my  watch."  The  bene- 
ficiary, or  person  designated  in  the  will  to  receive  real  property,  is 
called  the  legatee. 

350.  Origin  and  Nature  of  Wills.  At  common  law,  a  person 
was  permitted  to  give  by  will  a  portion  of  his  personal  property. 
He  was  not  permitted  to  give  real  property  by  will.  In  England, 
the  right  to  give  real  property  by  will  was  given  by  statute.  The  law 
of  this  country  has  always  recognized  the  right  to  give  real  as  well 
as  personal  property  by  will.  It  is  not  regarded  as  a  right  but  rather 
as  a  privilege  extended  to  an  owner  of  property.  This  privilege  is 
controlled  by  the  legislatures  of  the  states. 

The  states  differ  in  their  statutory  requirements  as  to  the  man- 
ner of  making  wills,  and  the  amount  of  property  that  may  be  willed 
to  the  exclusion  of  the  wife  and  family.  A  will  must  be  signed, 
acknowledged,  and  witnessed  as  required  by  statute,  and  may  be 
rendered  void  if  the  statutory  requirements  are  changed  between 
the  time  the  will  is  made  and  the  death  of  the  testator.  A  will  is 
not  a  contract.  The  right  to  make  contracts  cannot  be  abridged 
by  legislation.  This  right  is  a  constitutional  right.  The  constitu- 
tion gives  an  owner  of  property  no  right  to  make  a  will.  It  is  a 
privilege  which  may  be  abridged  or  taken  away  by  the  legislature. 
Most  of  the  states  give  a  wife  a  dower  interest  in  the  real  estate  of 
her  husband.  (See  Dower  Estate,  chapter  on  Real  Property.)  A 
husband  cannot  will  away  his  estate,  depriving  his  wife  of  dower. 

35!.  Law  Governing  Wills  When  Testator  Owns  Property 
in  One  State  and  Resides  in  Another  at  Time  of  Death.  Real  property 
is  fixed  and  immovable.  No  matter  where  a  testator  resides  at  the 
time  of  his  death,  the  law  of  the  state  where  the  real  property  is 
located  governs  the  will  relative  to  its  disposition.  If  the  will  does 
not  comply  with  the  law  of  the  state  where  the  real  property  is  located, 
the  general  rule  is  that  the  will  cannot  be  enforced,  even  though  the 


COMMERCIAL  LAW  27.', 

will  is  valid  under  the  law  of  the  state  where  the  testator  resides  at 
the  time  of  his  death.  For  example,  if  A  owns  real  property  in  Cleve- 
land, Ohio,  but  resides  in  Omaha,  Nebraska,  A  may  make  a  valid 
will  under  the  law  of  Nebraska  which  may  not  comply  with  the  Ohio 
law.  If  A  dies,  the  provisions  of  the  will  cannot  be  enforced  as  to 
the  real  property  in  Cleveland.  Personal  property,  on  the  other 
hand,  is  movable  and  is  supposed  to  follow  the  residence  of  its  owner. 
If  a  will  is  valid  where  the  testator  resides  at  the  time  of  his  death  it 
is  valid  to  pass  personal  property,  regardless  of  where  the  personal 
property  is  located.  Some  states  at  present  provide  by  statute  that 
if  a  will  is  valid  where  the  testator  resided  at  the  time  of  his  death, 
it  is  valid  to  pass  real  property,  no  matter  where  located. 

352.  Essentials  of  a  Will.  Primarily,  a  will  is  an  instrument 
in  which  a  person  expresses  his  intention  to  give  his  property  to 
certain  designated  persons,  to  take  effect  upon  his  death.  Any  in- 
strument, no  matter  whether  it  be  termed  a  will,  containing  an  ex- 
pression of  intention  to  have  property  pass  to  another  at  the  death 
of  the  maker,  satisfies  the  requirement. 

To  constitute  a  will,  there  must  be  no  present  interest  in  the 
property  passing  absolutely  to  the  beneficiaries  named  in  the  in- 
strument at  the  time  the  written  instrument  is  made.  A  person 
may  make  a  gift,  a  bill  of  sale,  or  a  deed  of  property  if  he  chooses. 
The  title  to  the  property  passes  to  the  purchaser  or  donee  at  once 
or  at  some  future  stipulated  time.  Such  transactions  are  not  wills. 
A  will  does  not  take  effect  until  the  death  of  the  testator.  It  may 
be  revoked,  changed,  or  supplanted  at  the  will  of  the  testator.  Anv 
instrument  that  conveys  a  present  interest  is  not  a  will.  The  two 
most  essential  things  in  determining  whether  an  instrument  consti- 
tutes a  will  are,  first,  the  power  to  revoke  the  instrument,  or  a  stipu- 
lation or  language  used  showing  that  the  instrument  is  not  to  take 
eflfect  until  the  testator's  death;  and  second,  the  expression  of  an  in- 
tention of  the  testator  to  make  a  will.  Certain  formal  requisites 
as  to  signature  and  witnessing  are  required  by  statute  in  different 
states.     These  requirements  are  discussed  under  separate  sections. 

353.  Who  May  Make  a  Will.  By  statute  in  most  states,  any- 
one of  legal  age,  of  sountl  and  disposing  niind  and  memory  may 
make  a  will.  At  common  law,  when  a  woman  niarritxl,  her  property 
became  her  husband's.     A  married  woman  could  not  make  a  will. 


27(;  COMMERCIAL  LAW 

At  present,  by  statute,  most  states  provide  that  married  women 
may  contract  concerning  their  separate  estates.  They  are  also 
permitted  to  make  wills.  A  person  must  be  of  legal  age  to  make 
a  will.  What  constitutes  legal  age  is  fixed  by  statute  in  the  different 
states.  All  provide  that  twenty-one  years  is  the  legal  age  for  males. 
Some  fix  the  legal  age  for  females  at  eighteen,  others  at  twenty-one. 

WTiat  constitutes  sound  and  disposing  mind  and  memory  is  a 
matter  of  some  dispute.  It  is  conceded  that  idiots,  imbeciles,  and 
insane  persons,  while  insane,  cannot  make  wills.  The  mental 
capacity  required  of  a  person  to  enable  him  to  make  a  will  is  usually 
stated  to  be  that  mental  capacity  which  enables  a  person  to  describe 
his  property,  to  name  the  natural  objects  of  his  bounty,  and  to  under- 
stand the  nature  of  a  will.  A  person  does  not  have  to  be  in  good 
health  to  make  a  will.  He  does  not  have  to  be  mentally  sound  within 
the  ordinary  meaning  of  the  term.  He  may  be  very  ill,  and  weak 
both  in  mind  and  body.  He  may  be  eccentric,  may  have  been  in- 
sane, may  be  subject  to  illusions,  or  even  may  be  under  guardian- 
ship for  insanity  and  still  be  able  to  make  a  will.  If  he  is  able  with- 
out assistance  from  others  to  describe  his  property,  to  understand 
in  general  the  nature  and  effect  of  making  a  will,  and  to  name  the 
persons  who  are  the  natural  objects  of  his  bounty,  he  is  capable  of 
making  a  will.  If  his  mind  is  not  sufficient  to  perform  all  of  these 
functions  he  is  not  capable  of  making  a  will.  To  constitute  an  in- 
strument a  valid  will,  it  is  not  necessary  that  the  instrument  show  in 
itself  that  the  testator  had  all  these  powers.  He  may  not  name  all, 
or  any  of  the  natural  objects  of  his  bounty  in  the  will.  He  may  not 
describe  all  of  his  property.  If  he  was  capable  of  doing  these  things 
at  the  time  he  made  the  will,  regardless  of  w^hether  or  not  he  exer- 
cised this  capacity,  the  will  is  valid. 

If  a  testator  makes  a  will  under  such  mental  pressure  or  threat 
of  violence  that  he  does  not  act  according  to  his  wishes,  the  will 
may  be  avoided  by  reason  of  undue  influence  or  duress.  Undue 
influence  may  he  exerted  by  anyone,  but  not  necessarily  by  a  bene- 
ficiary under  the  will.  All  solicitations  or  remarks  or  supplications 
to  the  testator  to  make  a  particular  provision  in  a  will  do  not  consti- 
tute undue  influence.  The  influence  must  be  of  a  sort  to  compel 
the  testator  to  act  against  his  wishes,  and  to  destroy  his  ability  to  act 
through  his  own  mental  agency. 


COMMERCIAL  LAW  277 

354.  What  May  be  Disposed  of  by  Will.  Any  property  owned 
by  the  testator,  whether  real  or  personal,  may  be  disposed  of  by 
will.  Property  cannot  be  freed  from  liens  or  incumbrances  by  will. 
If  A  owns  a  farm,  but  B  has  a  mortgage  on  it,  A  can  dispose  of  his 
interest  by  will,  B  retaining  his  interest  in  the  mortgage  as  against 
the  devisee.  A  husband  cannot  cut  off  his  wife's  dower  estate  by 
will.  A  person  may  dispose  of  all  his  real  and  personal  property 
by  will.  A  will  covering  all  the  real  and  personal  property  of  the 
testator  will  pass  the  real  and  personal  property  acquired  by  the 
testator  after  he  made  the  will. 

355.  Requisites  of  a  Will  as  to  Form.  Ordinarily,  a  will 
must  be  in  writing.  In  some  jurisdictions,  and  under  certain  circum- 
stances, oral  wills  are  recognized  as  sufficient  to  pass  certain  property. 
These  oral  wills  are  called  nuncupative  wills.  They  are  discussed 
under  a  separate  section.  A  will  may  be  written  on  any  kind  of 
material,  and  in  any  language.  It  may  be  printed,  written  on  a 
typewriter,  wTitten  in  the  testator's  own  handwTiting  or  by  another. 
It  may  be  written  on  one  or  several  pieces  of  paper.  The  pieces 
need  not  be  fastened  together  if  their  contents  show  their  connection. 
Another  instrument  not  set  forth  in  the  will  may  be  incorporated 
into  the  will  by  reference,  if  the  instrument  can  readily  be  identified, 
and  was  in  existence  at  the  time  the  will  was  made.  A  will  must  be 
signed. 

The  statutes  of  most  states  require  that  a  will  be  signed  by 
the  testator,  or  by  some  one  authorized  to  sign  for  him.  A  person 
not  able  to  write  may  sign  by  mark.     A  person  usually  signs  by 

his 
mark  as  follows:  John  X  Smith.     Any  mark  made  by  the  testator 

mark 
is  sufficient.  Most  states  require  by  statute  that  wills  must  be  signed 
in  the  presence  of  two  or  three  witnesses.  These  witnesses  must 
be  competent  to  understand  the  nature  of  the  transaction.  They 
need  not  necessarily  be  of  legal  age.  They  must  affix  their  signatures 
as  witnesses  to  the  will.  A  beneficiary  under  the  will  should  not  be 
a  witness.  The  witnesses  of  a  will  are  required  to  observe  the  com- 
petency of  the  testator  and  his  signature,  in  order  that  they  may 
testify  to  these  facts  when  the  will  is  proven.  The  statutes  of  most 
states  make  it  sufficient  for  the  testator  to  acknowledge  his  signature 


278  COMMERCIAL  LAW 

in  the  presence  of  the  witnesses.  In  this  event,  they  need  not  see 
him  sign  his  name  to  the  will.  The  witnesses  are  usually  required 
to  sign  the  will  in  the  presence  of  the  testator,  and  in  the  presence  of 
each  other. 

356.  Publication  of  a  Will.  Some  states  provide  by  statute 
that  to  constitute  a  written  instrument  a  valid  will,  the  testator  must 
acknowledge  it  to  be  a  will  at  the  time  it  is  signed  and  witnessed. 
This  act  is  known  as  publication.  Some  states  do  not  have  such  a 
statutory  provision.  In  the  absence  of  statutory  provisions,  publica- 
tion is  not  necessary.  It  is  not  necessary  that  the  testator  read  or 
cause  the  will  to  be  read  to  the  witnesses  to  comply  with  the  statutory 
requirements  of  publication.  The  witnesses  must  know  that  they 
are  witnessing  ja  will.  Any  word,  expression  or  act  on  the  part  of 
the  testator  which  notifies  the  witnesses  that  they  are  witnessing  a 
will  is  a  sufficient  publication. 

A  requested  B  and  C  to  visit  his  house  in  the  evening  and  wit- 
ness his  will.  They  went  to  A's  house,  where  A  presented  a  docu- 
ment to  them,  which  he  signed  in  their  presence,  and  which  they 
signed  as  witnesses.  A  did  not  acknowledge  that  the  instrument 
was  a  will.  The  court  held  this  to  be  a  sufficient  publication.  B 
and  C  had  been  informed  that  the  instrument  was  A's  will. 

357.  Contract  to  Make  a  Will.  A  person  may  enter  into  a 
contract  to  make  a  will  which  wall  bind  his  estate.  The  party  with 
whom  such  a  contract  is  made  cannot  force  the  other  party  to  make 
a  will,  or  prevent  him  from  revoking  a  will  if  made,  but  he  can 
bring  an  action  for  damages  against  such  party's  estate  if  the  latter 
dies  without  leaving  a  will  according  to  his  agreement.  A  will 
can  be  revoked  at  the  desire  of  the  testator.  Revocability  is  one  of 
the  essential  features  of  a  will.  A  party  may  bind  himself  by  con- 
tract to  make  a  will  in  favor  of  a  certain  person.  This  contract  does 
not  prevent  such  person  from  revoking  the  will  if  made,  but  it  ren- 
ders the  person's  estate  liable  for  breach  of  contract.  A,  a  boy  of 
twenty-one  years  of  age,  was  told  by  his  father,  B,  that  if  he  would 
continue  to  work  for  him  until  he  was  thirty-five  years  of  age,  he 
would  will  him  a  certain  farm.  A  agreed  to  this  proposition,  and 
worked  for  his  father  until  he  was  thirty-five  years  of  age.  B  sub- 
sequently died,  leaving  a  will  by  which  the  farm  was  given  to  an- 
other son.     A  was  permitted  to  recover  the  value  of  the  farm  by  suit. 


CO]\IMERCIAL  LAW  279 

These  contracts  require  clear  and  convincing  evidence  to  sup- 
port recovery.  A  agreed  to  board,  clothe,  care  for,  and  bury  B,  his 
father,  in  consideration  of  B\s  agreement  to  give  A  all  his  property. 
A  fulfilled  the  terms  of  his  contract.  B  died  leaving  a  will  by  which 
his  property  was  given  to  C.  A  was  permitted  to  recover  the  value 
of  the  property  by  suit. 

358.  Holographic  Wills.  A  holographic  will  is  one  written 
entirely  in  the  handwriting  of  the  testator.  Such  wills  are  sometimes 
called  olographic  wills.  A  minority  of  the  states  of  this  country 
recognize  the  validity  of  holographic  wills.  These  wills  need  not 
be  witnessed  to  be  valid.  An  ordinary  will  may  be  printed,  type- 
written, or  written  by  a  person  other  than  the  testator.  The  testator 
must  sign  and  publish  the  will,  that  is,  he  must  acknowledge  the  in- 
strument to  be  a  will,  in  the  presence  of  the  attesting  witnesses.  In 
case  of  a  holographic  will,  there  need  be  no  witnesses,  acknowledg- 
ment, or  publication,  but  the  will  must  be  entirely  in  the  handwriting 
of  the  testator,  and  must  be  signed  and  dated  by  the  testator  himself. 

In  some  jurisdictions,  it  is  necessary  that  a  holographic  will  be 

found  among  the  testator's  valuable  papers,  to  constitute  a  valid  will. 

A  died  and  the  following  document  was  found  among  his  valuable 

papers : 

$100,000.00 
Four  years  after  my  death,  I  hereby  authorize  my  executors  to  pay 
Francis  Penn  one  hundred  thousand  dollars. 

Signed  A. 

This  was  held  to  be  a  valid  holographic  will.     A  holographic 

will  is  frequently  in  the  form  of  a  letter  addressed  to  the  beneficiary. 

359.  Nuncupative  Wills.  Many  of  the  states  of  this  country 
recognize  the  validity  of  oral  wills  made  under  certain  circumstances 
for  the  purpose  of  disposing  of  personal  property.  Such  wills  are 
called  nuncupative  wills.  Soldiers  and  sailors  while  in  actual  service 
may  dispose  of  their  personal  property  by  this  form  of  will. 

Persons  other  than  soldiers  and  sailors  may  make  nuncupative 
wills  when  in  their  last  sickness  or  in  danger  of  impending  death. 
The  will  is  made  by  calling  upon  disinterested  persons  to  bear  witness 
to  the  will  which  the  testator  describes  orally.  These  words,  in 
substance  at  least,  must  be  reduced  to  writing,  usually  within  ten 
days  from  the  death  of  the  testator,  by  one  of  the  witnesses,  and  signed 
b^  the  witnesses.     Nuncupative  wills  are  not  favored  in  law.     They 


280  COMMEKCIAL  LAW 

are  not  sufficient  to  dispose  of  real  property.  Some  states  do  not 
recognize  the  validity  of  these  wills  unless  they  are  made  at  the  tes- 
tator's dwelling.  An  exception  to  this  rule  is  where  the  testator, 
surprised  by  sickness  when  upon  a  journey,  dies  while  away  from 
home.  Nuncupative  wills  must  be  proven  within  six  months  after 
they  are  reduced  to  writing.  A  was  suddenly  taken  seriously  ill  at 
his  home.  He  called  upon  B  and  C,  disinterested  witnesses,  to 
bear  witness  to  his  will,  and  directed  that  his  personal  property  be 
given  to  his  wife  D.  A  died,  B  reduced  the  words  of  A  to  writing 
within  ten  days  after  A's  death,  and  C  and  B  signed  as  witnesses. 
The  will  was  proven  within  six  months.  It  was  held  to  be  a  valid 
nuncupative  will. 

360.  Revocation  and  Alteration  of  Wills.  A  will  may  be 
revoked  at  any  time  before  the  testator's  death.  The  testator  may 
himself  revoke  his  will,  or  he  may  cause  someone  to  perform  some 
act  under  his  direction  and  in  his  presence,  which  will  revoke  the 
will.  The  statutes  of  most  states  provide  that  a  person  may  revoke 
a  will  by  tearing,  cancelling,  obliterating,  or  destroying  the  will  with 
the  intention  of  revoking  it.  Any  of  these  acts  performed  by  a 
stranger,  not  in  the  presence  nor  under  the  direction  of  the  testator, 
are  void  acts,  and  do  not  destroy  the  validity  of  the  will.  If  the 
testator  himself,  tears,  cancels,  destroys,  or  obliterates  the  will  with 
the  intention  of  revoking  the  will,  the  instrument  no  longer  has  any 
validity  or  force  as  a  will.  A  will  is  cancelled  by  drawing  lines  with 
a  pen  or  pencil  across  the  written  portion  of  the  will.  A  will  may  be 
revoked  by  a  later  will  which  expressly  revokes  the  former,  or  which 
disposes  of  all  the  property  of  the  testator.  A  later  will  which  does 
not  expressly  revoke  a  former  will,  and  which  does  not  dispose  of  all 
the  testator's  property  does  not  revoke  the  former  will,  but  both  are 
construed  together.  A  codicil  is  an  instrument  altering,  revoking, 
changing,  or  adding  to  certain  portions  of  a  will.  It  must,  itself, 
be  signed,  witnessed  and  acknowledged  the  same  as  a  will,  and  is 
construed  as  part  of  the  will. 

361.  Lost  Wills.  A  will  which  is  lost  or  destroyed  with  no 
intention  to  revoke  may  be  proven  as  a  will  after  the  testator's  death. 
If  a  will  is  partially  or  totally  destroyed  by  accident,  or  by  someone 
who  is  to  profit  by  the  total  or  partial  destruction,  the  will  is  said  to 
be  spoliated,  and  its  contents,  as  it  existed  before  spoliation,  may  be 


COMMEIICIAL  LAW  2.^1 

proven  after  the  testator's  death.  It  must  be  remembered  that  a 
will  may  be  revoked  by  a  testator  at  any  time.  If  a  testator  makes 
a  will,  and  has  it  in  his  possession,  and  after  his  death  the  will  cannot 
be  found,  the  presumption  is  that  he  revoked  the  will.  This  pre- 
sumption may  be  rebutted,  however.  If  the  testator  tells  of  having 
a  will  shortly  before  his  death,  or  if  the  will  is  seen^  or  any  evidence 
is  produced  that  the  will  was  not  revoked  by  the  testator,  it  may  be 
proven  as  a  lost  will.  If  a  will  is  made  and  left  for  safe-keeping 
with  a  third  person,  inability  to  find  it  after  the  testator's  death  raises 
no  presumption  that  is  was  revoked  by  the  testator.  To  prove  a 
lost  will  as  a  will,  witnesses  must  be  produced  who  know  in  substance 
the  contents  of  the  will,  that  it  was  made  and  that  it  w^as  not  revoked 
by  the  testator.  lit  a  ^vill  is  partially  destroyed  by  someone  who  is 
to  benefit  thereby,  or  by  accident,  the  contents  of  the  portion  so 
destroyed  may  be  proven  as  a  lost  will. 

362.  Abatement,  Advancement,  and  Ademption.  If  a  person 
does  not  have  sufficient  property  at  his  death  to  pay  the  bequests 
and  devises  made  in  his  will  after  payment  of  his  debts,  his  devises 
and  bequests  are  paid  pro  rata  out  of  the  estate  remaining  after  the 
payment  of  debts  and  expenses,  unless  the  testator  expressed  a  wish 
or  intention  that  certain  bequests  or  devises  were  to  be  satisfied  in 
preference  to  others.  In  this  event,  the  wishes  of  the  testator  must 
be  observed.  The  rule  requiring  all  devisees  and  legatees  to  receive 
but  a  portion  of  the  property  mentioned  in  the  will,  in  case  there  is 
not  sufficient  property  to  satisfy  all,  is  called  abatement. 

If  a  person  makes  a  will  bequeathing  a  certain  article  of  per- 
sonal property,  or  a  certain  amount  of  money  to  another,  and  if, 
before  the  will  becomes  operative  by  the  death  of  the  devisor,  the 
latter  delivers  the  article  or  pays  the  money  to  the  legatee,  or  sells 
or  disposes  of  the  particular  article  mentioned  in  the  bequest,  the 
will  is  said  to  be  adeemed,  and  the  act  by  which  it  is  adeemed  is  called 
ademption.  In  case  of  ademption  of  a  particular  article,  the  bequest 
is  satisfied.  In  case  a  certain  sum  of  money  is  bequeathed  to  a  person 
by  will,  and  the  amount  of  money  is  given  the  legatee  by  the  devisor, 
whether  it  satisfies  the  bequest,  or  whether  it  is  a  gift  in  addition  to 
the  bequest  mentioned  in  the  will,  is  a  matter  of  intention  on  the  part 
of  the  devisor.  If  the  devisor  expressly  says  it  is  a  gift  in  addition 
to  the  bequest  mentioned  in  the  will,  it  will  not  satisfy  the  bequest 


282  COMMERCIAT.  LAW 

mentioned  in  the  will.  If  nothing  is  said  which  expressly  shows  the 
wish  or  intent  of  the  devisor,  tlie  presumption  is,  that  it  is  to  apply  on 
the  bequest,  or  if  sufficient  in  amount,  that  it  satisfies  the  bequest. 
The  intent  of  the  testator  may  be  determined  by  the  circumstances 
connected  with  the  payment.  If  a  sum  of  money  is  paid  by  a  testator 
during  his  lifetime  to  a  legatee  mentioned  in  his  will,  to  apply  on  the 
bequest,  the  payment  is  sometimes  called  an  advancement. 

363.  Form  of  Will. 

I,  John  Brown,  of  the  City  of  Chicago,  County  of  Cook,  and  State  of 
Illinois,  being  about  61  years  of  age,  and  of  sound  and  disposing  mind  and 
memory,  do  make  and  publish  this  my  last  will  and  testament. 

First,  I  desire  that  all  my  debts  and  the  expenses  connected  with  my 
funeral  be  paid. 

Second,  I  give,  devise  and  bequeath  to  my  wife,  Jane  Brown,  the  sum 
of  $10,000.00,  all  the  household  furniture  and  chattel  property  of  every  kind 
and  nature  used  in  and  in  connection  with  our  residence,  and  a  life  estate  in 
my  two  farms. 

Third,  I  give  and  devise  to  my  two  sons,  John  Brown,  Jr.,  and  Clark 
Brown,  jointly,  my  farm  known  as  the  "Home  Place."  This  devise  is  sub- 
ject to  the  life  estate  of  my  wife  mentioned  in  division  two  of  my  will. 

Fourth,  I  give  and  devise  to  my  daughter,  Anna  Brown,  my  farm  known 
as  the  "North  Place,"  during  her  life,  and  at  her  death  to  her  lawful  issue. 
This  devise  is  subject  to  the  life  estate  of  my  wife,  provided  for  in  division  two 
of  this  will. 

Fifth,  the  balance  of  my  personal  property  I  give  and  bequeath  to  Smith 
Home  for  Aged  Men,  of  Chicago. 

I  appoint  my  son,  John  Brown,  Jr.,  executor  of  this  will,  and  revoke  all 
former  wills.  In  witness  whereof,  I  have  subscribed  my  name  this  10th  day 
of  September,  1909. 

John  Brown. 

The  foregoing  instrument  was  signed  by  the  said  John  Brown  in  our 
presence,  and  by  him  published,  and  declared  to  be  his  last  will  and  testament, 
and  at  his  request,  and  in  our  presence  and  in  the  presence  of  each  other,  we 
subscribed  our  names  as  attesting  witnesses  at  Chicago,  Illinois,  this  10th  day 
of  September,  1909. 

Thomas  Jones,  Residing  at  21  State  St., 
James  Johnson,  Residing  at  4704  Drexel  Ave., 

Chicago,  111. 

COURTS  AND  LEGAL  REMEDIES 

364.  Courts.  Courts  may  be  defined  to  be  the  institutions 
established  by  the  government  to  settle  disputes  and  to  administer 
justice.  They  may  consist  of  a  judge  sitting  alone,  of  several  judges 
sitting  together,  or  of  a  judge  and  a  jury.     Courts  are  assisted  in 


COMMERCIAL  LAW  283 

their  work  by  bailiffs  and  clerks.  Attorneys  who  conduct  the  trials 
for  the  opposing  parties  are  oflficers  of  the  court.  They  can  be  fined 
and  imprisoned  for  refusing  to  obey  the  lawful  order  of  the  court. 
In  general,  courts  may  be  divided  into  state  courts  and  federal  or 
United  States  courts. 

365.  Federal  Courts.  The  Constitution  of  the  United  States 
provides  that: 

"The  judicial  powers  of  the  United  States  shall  be  vested  in  one  supreme 
court,  and  in  such  inferior  courts  as  the  Congress  may  from  time  to  time 
ordain  and  establish.  The  judges  both  of  the  supreme  and  inferior  courts 
shall  hold  their  offices  during  good  behavior,  and  shall  at  stated  times  receive 
for  their  services  a  compensation,  which  shall  not  be  diminished  during  their 
term  of  office." 

The  United  States  Constitution  further  proivdes  that: 

"The  judicial  power  shall  extend  to  all  cases  in  law  and  equity  arising 
under  the  constitution,  the  laws  of  the  United  States,  the  treaties  made,  or 
which  shall  be  made,  under  their  authority;  to  all  cases  affecting  ambassadors, 
other  public  ministers  and  consuls;  to  all  cases  of  admiralty  and  maritime 
jurisdiction;  to  controversies  to  which  the  United  States  shall  be  a  party;  to 
controversies  between  two  or  more  states,  between  a  state  and  citizens  of 
another  state,  between  citizens  of  different  states,  between  citizens  of  the 
same  state  claiming  land  under  grants  of  different  states,  and  between  a  state 
and  the  citizens  thereof,  and  foreign  states,  citizens  or  subjects." 

Congress  has  provided  for  District  Courts,  Circuit  Courts,  and 
Circuit  Courts  of  Appeal,  which,  in  addition  to  the  Supreme  Court, 
constitute  the  Federal  or  United  States  Courts. 

366.  United  States  District  Courts.  The  United  States  as  a 
whole  is  divided  into  districts.  Each  district  is  presided  over  by 
one  United  States  judge,  called  a  district  judge.  Each  state  con- 
stitutes at  least  one  district  and  some  states  are  divided  into  several 
districts.  For  example,  Ohio  has  two  districts,  called  the  Northern 
and  Southern  Districts  of  Ohio.  New  York  has  four  districts,  called 
the  Northern,  Southern,  Eastern,  and  Western  Districts.  The  judges 
are  appointed  for  life,  or  during  good  behavior.  The  appointments 
are  made  by  the  President  of  the  United  States,  by,  and  with  the 
advice  and  consent  of  the  senate.  Each  district  judge  is  required 
to  reside  in  the  district  for  which  he  is  appointed. 

367.  United  States  Circuit  Courts.  The  entire  territory  of  the 
United  States  is  divided  into  nine  sections,  and  each  section  com- 
prises the  jurisdiction  of  a  separate  United  States  Court.     That  is. 


284  COMMERCIAL  LAW 

there  are  nine  Circuit  Courts  in  the  United  States.  Each  circuit  is 
composed  of  several  districts.  For  example,  the  sixth  circuit  is  com- 
posed of  the  states  of  Ohio,  Kentucky,  Michigan,  and  Tennessee. 
Each  circuit  has  at  least  two  circuit  judges,  and  is  presided  over  by 
one  of  the  judges  of  the  Supreme  Court  of  the  United  States.  The 
Circuit  Court  holds  court  in  each  district  of  the  circuit,  and  the 
Circuit  Court  of  each  district  is  composed  of  the  United  States 
Supreme  Court  judge  presiding  over  the  circuit,  the  two  circuit 
judges,  and  the  district  judge  of  the  district.  The  Circuit  Court 
holds  court  at  different  times  in  each  district  of  the  circuit.  Any 
one  judge  may  hold  court  alone.  Usually,  trials  in  Circuit  Courts 
are  presided  over  by  one  judge. 

The  United  States  Circuit  Court  and  the  United  States  District 
Courts  have  original  and  exclusive  jurisdiction  of  practically  all 
the  cases  which  may  be  brought  in  the  United  States  Courts.  The 
United  States  Supreme  Court  has  original  jurisdiction  of  a  few 
important  classes  of  cases.  By  original  jurisdiction  is  meant  the 
right  to  commence  cases  in  the  particular  court.  By  appellate 
jurisdiction  is  meant  the  right  to  take  a  case  from  one  court  to  a 
higher  court  upon  appeal  or  writ  of  error,  for  the  purpose  of  having 
the  case  retried  or  examined  for  errors  of  law. 

368.  United  States  Circuit  Court  of  Appeals.  Each  of  the 
circuits  in  the  United  States  has  a  Circuit  Court  of  Appeals.  This 
court  consists  of  one  member  of  the  United  States  Supreme  Court, 
who  acts  as  presiding  judge,  and  the  two  circuit  judges  of  the  circuit. 
At  least  two  judges  must  be  present  to  hold  court.  If  two  of  the 
regular  circuit  judges  are  not  present,  a  district  judge  of  any  district 
of  the  circuit  may  act.  A  district  judge  cannot  sit  as  judge  of  the 
Court  of  Appeals  in  determining  cases  in  the  trial  of  which  he  acted 
as  district  judge.  The  Circuit  Court  of  Appeals  has  no  original 
jurisdiction.  It  is  solely  an  appellate  court.  Cases  from  the  Dis- 
trict and  Circuit  Courts  may  be  appealed  to  it,  and  brought  before 
it  on  writs  of  error.  Some  cases  may  be  appealed  direct  to  the  Su- 
preme Court  of  the  United  States  from  the  District  and  Circuit 
Courts.  The  Circuit  Court  of  Appeals  has  final  jurisdiction  in 
many  matters  appealed  to  it. 

369.  The  Supreme  Court  of  the  United  States.  The  Supreme 
Court  of  the  United  States  holds  court  at  Washington,  and  consists 


COIVIMERCIAL  LAW  2S5 

of  nine  judges.  It  has  original  jurisdiction  in  some  important 
matters,  and  cases  may  be  appealed  to  it,  or  tried  on  writs  of  error 
from  the  District  Court,  Circuit  Court,  and  Circuit  Court  of  Appeals. 
The  Constitution  of  the  United  States  provides  that,  "In  all  cases 
affecting  ambassadors,  other  public  ministers  and  consuls,  and  those 
in  which  a  state  shall  be  a  party,  the  Supreme  Court  shall  have 
original  jurisdiction." 

370.  United  States  Courts  with  Admiralty  Jurisdiction.  The 
Constitution  of  the  United  States  provides  that  the  United  States 
Courts  shall  have  jurisdiction  over  admiralty  and  maritime  cases. 
Admiralty  cases  comprise  those  cases  arising  out  of  breach  of  con- 
tract, or  out  of  injuries  occurring  upon  the  seas  or  navigable  waters 
within  the  jurisdiction  of  the  United  States.  The  District  Courts 
of  the  United  States  are  given  original  jurisdiction  in  admiralty 
cases.  In  the  trial  of  admiralty  cases,  the  judge  acts  alone  and  is  not 
assisted  by  a  jury. 

371.  State  Courts.  The  United  States  Constitution  provides 
that,  "The  powers  not  delegated  to  the  United  States  by  the  Consti- 
tution nor  prohibited  by  it  to  the  states,  are  reserved  to  the  states 
respectively  or  to  the  people."  Thus,  the  provision  of  the  United 
States  Constitution,  authorizing  the  creation  of  federal  courts  does 
not  prevent  the  states  from  establishing  and  maintaining  courts. 
Each  state  has  its  own  courts.  In  fact  the  bulk  of  litigation  is  tried 
by  state  courts.  The  courts  of  the  different  states  differ  somewhat 
in  name  and  jurisdiction.  Most  of  the  states  have  a  court  of  inferior 
jurisdiction  where  small  cases  involving  $300.00  or  less,  are  tried, 
and  a  County  Court  where  cases  involving  more  than  $300.00  are 
tried,  and  to  which  cases  may  be  appealed  from  the  inferior  courts. 
The  inferior  court  is  usually  called  a  Magistrate  Court,  or  a  court 
of  a  Justice  of  the  Peace.  All  states  have  a  court  of  last  resort,  usually 
called  a  Supreme  Court.  The  primary  function  of  state  Supreme 
Courts  is  to  hear  appealed  cases  and  cases  brought  to  it  upon  writs 
of  error.  They  have  very  little  original  jurisdiction.  Supreme 
Courts  consist  of  judges  only.     They  have  no  juries. 

Some  states  have  an  Appellate  Court  inferior  to  the  Supreme 
Court,  which  has  jurisdiction  to  hear  cases  on  appeal  and  error. 
The  states  also  have  courts  for  the  administration  of  estates,  called 
Probate,  Surrogate,  or  Orphans'  Courts. 


286  COMMERCIAL  LAW 

372.  Courts  of  Equity.  Originally  in  England,  the  king  was 
regarded  as  having  original  right  to  administer  justice.  It  became 
the  custom  to  appeal  to  the  king  in  cases  where  the  common  law 
rules  afforded  no  remedy.  Later,  appeals  were  made  to  the  chan- 
cellor, the  king's  secretary.  Cases  were  also  referred  by  the  king 
to  the  chancellor.  In  time,  a  distinct  court,  governed  by  well  estab- 
lished precedents  and  rules,  was  established.  These  courts  were 
called  the  Courts  of  Chancery  or  Courts  of  Equity.  Their  jurisdic- 
tion covered  only  those  cases  not  covered  by  Courts  of  Law.  Chan- 
cery courts  consisted  of  a  judge  only,  or  a  number  of  judges  who 
heard  and  determined  cases  without  the  assistance  of  a  jury.  Courts 
of  Equity  are  recognized  in  this  country,  but  few  states  have  separate 
courts  of  Equity  or  Chancery.  The  same  judge  is  authorized  to  act 
as  a  Court  of  Law  and  a  Court  of  Equity.  Equity  has  jurisdiction 
of  those  cases  only,  in  which  there  is  no  adequate  remedy  at  law. 

If  A  makes  a  contract  with  B  by  which  he  purchases  a  certain 
desirable  house  and  lot  and  B  refuses  to  make  the  transfer,  and  if 
the  house  and  lot  are  of  such  a  character  that  ^  cannot  obtain  another 
which  suits  his  purpose  and  fancy,  B  may  be  compelled  by  a  Court 
of  Equity  to  transfer  the  lot  to  ^.  A  Court  of  Law  would  give  A  money 
damages  for  breach  of  contract,  but  would  not  compel  B  specifically 
to  perform  the  contract.  The  United  States,  as  well  as  the  states, 
has  Courts  of  Equity. 

373.  Legal  Actions  and  Their  Enforcement.  Legal  actions 
may  be  said  to  be  of  three  kinds,  those  arising  out  of  contract,  those 
arising  out  of  torts,  and  those  arising  out  of  crimes.  Crimes  are 
punishable  by  fine,  imprisonment,  or  death.  The  state,  through  its 
officers,  punishes  criminals.  In  theory,  a  crime  is  a  wrong  com- 
mitted against  the  community.  The  community,  that  is,  the  state, 
through  its  oflBcers,  convicts  and  punishes  persons  who  have  committed 
crimes.  The  person  who  is  injured  personally,  or  whose  property  is 
injured,  has  an  action  for  damages  against  the  party  committing 
the  wrong.  This  action  is  independent  of  the  crime.  The  same 
act  may  render  a  person  liable  to  punishment  for  committing  a  crime, 
and  liable  to  an  action  for  damages  to  the  injured  party.  If  a  person 
wrongfully  strikes  another  and  injures  him,  the  state  may  punish 
the  guilty  party  for  committing  a  crime,  and  the  injured  person  may 
sue  him  for  damages. 


COMMERCIAL  LAW  2S7 

Legal  actions  arising  out  of  injuries  to  persons  and  property 
as  distinguished  from  crimes  are  called  civil  actions.  Civil  actions 
arise  out  of  breach  of  contract,  or  out  of  torts.  If  a  person  fails  to 
pay  a  promissory  note,  or  to  perform  any  contract,  a  legal  action 
arises  out  of  contract.  If  a  person  slanders  another,  or  wrongfully 
strikes  him,  a  legal  action  arises  out  of  tort.  Legal  actions  are  en- 
forced by  the  injured  or  complaining  party  filing  a  complaint  in 
court.  The  party  against  whom  the  complaint  is  filed  is  notified  of 
the  suit  by  an  officer  of  the  court.  This  notice  is  called  the  summons. 
The  written  complaint  is  usually  called  the  petition.  The  complain- 
ing party  is  usually  called  the  plaintiff.  The  party  against  whom 
the  petition  or  complaint  is  filed  is  called  the  defendant.  The  de- 
fendant is  allowed  a  certain  time  in  which  to  file  a  statement  of  his 
defense.  This  written  statement  of  the  defendant  in  which  he  sets 
forth  his  side  of  the  case  is  called  an  answer.  These  written  state- 
ments are  called  the  pleadings  in  the  case.  The  parties  then  appear 
in  court  with  their  witnesses  and  the  case  is  heard.  The  judge  de- 
termines questions  of  law,  and  the  jury  determines  questions  of  fact. 
The  decision  of  the  jury  is  called  the  verdict.  The  twelve  jurymen 
must  agree  to  enable  them  to  render  a  verdict.  If  they  disagree,  a 
new  trial  with  another  jury  is  held.  The  judge  may  set  aside  a 
verdict,  and  grant  a  new  trial  if  the  verdict  is  irregular,  or  contrary 
to  law.  When  a  judgment  has  been  rendered,  execution  may  be 
levied  upon  the  property  of  the  defeated  party  for  the  amount  of 
the  judgment  and  costs.  Execution  is  levied  by  the  sheriff,  who 
seizes  and  sells  the  property  of  the  defeated  party,  suflBcient  to  satisfy 
the  judgment. 


QUIZ  QUESTIONS 

MORTGAGES 

1.  What  was  the  nature  of  a  mortgage  at  common  law? 

2.  At  common  law  who  had  the  possession  of  real  property 
mortgaged  ? 

3.  Is  a  mortgage  a  contract? 

4.  What  names  arc  applied  to  the  parties  to  a  mortgage? 


288  COMMERCIAL  LAW 

5.  At  present  who  is  entitled  to  possession  of  mortgaged  real 
estate? 

6.  Under  what  circumstances,  if  any,  may  a  deed  be  con- 
strued to  be  a  mortgage? 

7.  What  is  the  ordinary  consideration  to  a  mortgage  contract? 

8.  May  a  mortgage  be  given  to  secure  a  future  indebtedness? 

9.  WTiat  is  meant  by  the  debt  secured  by  a  mortgage? 

10.  Is  an  oral  mortgage  of  real  estate  enforceable? 

11.  Distinguish  a  mortgage  and  a  deed. 

12.  If  a  mortgagor  stipulates  in  the  mortgage  that  he  waives 
his  equity  of  redemption  can  this  stipulation  be  enforced  against  him? 

13.  ^Vhat  is  meant  by  power  of  sale  mortgage  f 

14.  Explain  attestation  of  a  mortgage. 

15.  Explain  acknowledgment  of  a  mortgage. 

16.  AVhen  does  a  mortgage  become  effective? 

17.  Define  delivery  in  escrow. 

18.  What  interest  in  real  estate  may  be  mortgaged? 

19.  Is  a  mortgage  of  real  estate  regarded  as  a  transfer  of  the 
real  estate? 

20.  Explain  recording  mortgages. 

21.  What  is  the  necessity  of  recording  mortgages? 

22.  May  a  mortgagee  transfer  title  to  the  real  estate? 

23.  What  interest  in  the  real  estate  mortgaged  can  a  mortgagee 
transfer? 

24.  If  a  mortgagee  sells  the  debt  what  becomes  of  the  mortgage? 

25.  How  may  mortgages  be  satisfied? 

26.  Define  and  explain  equity  of  redemption. 

27.  Define  and  explain  foreclosure  of  mortgages. 

TRUSTS 

1.  DeG^ne  trusts  of  property. 

2.  Classify  trusts. 

3.  Define  grantor  of  a  trust. 

4.  Define  and  give  an  example  of  settlor  of  a  trust. 

5.  Define  and  give  an  example  of  a  trustee  of  a  trust. 

G.  Define  and   distinguish   beneficiary  of  a  trust,  and  cestui 
que  trust. 

7.  \Miat  classes  of  persons  may  be  parties  to  a  trust? 

8.  WTiat  kinds  of  property  may  be  the  subject  of  a  trust? 


COMMERCIAL  LAW  289 

9.  Define  and  give  an  example  of  an  express  trust. 
10.  Define  and  give  an  example  of  an  implied  trust. 
IL     Define  and  give  an  example  of  a  resulting  tru^t. 

12.  Define  and  give  an  example  of  a  constructive  trust. 

13.  ^^^lo  has  the  legal  title  to  trust  property? 

14.  Is  a  person  named  in  a  declaration  of  trust  as  trustee,  obliged 
to  accept  the  trust? 

15.  ^Miat  are  the  duties  and  liabilities  of  a  trustee? 

16.  May  a  beneficiary  of  a  trust  convey  title  to  the  trust  property  ? 

17.  If  a  trustee  wrongfully  disposes  of  trust  property  what 
remedies,  if  any,  has  the  beneficiary? 

LANDLORD   AND  TENANT 

1.  Define  lessor  and  lessee. 

2.  Distinguish  lease  and  sale. 

3.  Distinguish  lease  and  assignment. 

4.  Is  a  lease  a  contract? 

5.  Does  a  lease  carry  with  it  an  implied  warranty  that  the 
premises  described  are  in  good  condition? 

6.  A  rents  B's  house  for  one  year.  C,  a  stranger,  without  right 
attempts  by  legal  action  to  evict  A.  Does  A  have  a  right  of  action 
against  B  for  breach  of  implied  warranty  of  quiet  enjoyment? 

7.  For  what  purposes  may  a  tenant  use  leased  premises? 

8.  In  the  absence  of  express  agreement  what  party  to  a  lease 
is  obliged  to  pay  taxes  and  insurance  on  the  leased  premises? 

9.  A  lease  provides  that  the  tenant  is  to  pay  the  taxes.  A 
special  assessment  for  paving  is  levied.  Is  the  tenant  obliged  to  pay 
this  assessment? 

10.  Who  is  obliged  to  pay  water  rent  in  the  absence  of  any  special 
agreement  in  a  lease? 

11.  W'ho  is  obliged  to  pay  for  ordinary  repairs? 

12.  At  common  law  was  a  tenant  relieved  from  paying  rent  by 
the  destruction  by  fire  of  the  leased  premises? 

13.  What  is  the  rule  at  the  present  time  as  to  release  of  a  tenant's 
obligation  to  pay  rent  in  case  the  buildings  leased  are  destroyed  by 
fire? 

14.  Is  there  an  implied  obligation  on  the  part  of  the  landlord 
to  deliver  leased  premises  in  any  particular  condition? 


290  COMMERCIAL  LAW 

15.  If  a  tenant  is  injured  by  reason  of  secret  defects  in  the 
premises  is  the  landlord  liable  to  him  for  the  injury? 

16.  If  snow  and  ice  are  permitted  to  accumulate  on  the  walk  of 
the  leased  premises,  causing  injury  to  third  persons,  is  the  landlord 
or  tenant  liable  for  the  injury? 

17.  May  a  tenant  become  liable  for  rent  without  any  express 
agreement  to  that  effect? 

18.  jNIay  a  tenant  be  liable  for  rent  without  being  in  possession 
of  the  leased  premises? 

19.  A  rents  B's  house,  nothing  being  said  about  the  condition 
of  the  plumbing.  The  plumbing  leaks.  Is  A  obliged  to  take  the 
house? 

20.  If  a  tenant  abandons  the  rented  premises  before  expiration 
of  the  term  of  the  lease  and  so  notifies  the  landlord,  is  he  liable  for 
the  balance  of  the  rent? 

21.  In  case  a  tenant  abandons  the  rented  premises,  what  three 
remedies  has  the  landlord? 

22.  Define  distress. 

23.  At  common  law  could  a  landlord  sell  personal  property 
distrained? 

24.  \Miat  is  the  present-day  method  of  distraining  for  rent? 

25.  Define  lease. 

26.  Must  a  lease  be  in  any  particular  form  to  be  legal? 

27.  ^Miat  leases,  if  any,  must  be  in  writing? 

28.  A\Tiat  is  meant  by  attestation  of  a  lease? 

29.  Define  acknowledgment. 

30.  Whsii  is  the  necessity  of  acknowledgment  of  a  lease? 

31.  What  is  the  necessity  of  recording  leases? 

32.  Define,  and  give  an  example  of  an  express  covenant. 

33.  Define,  and  give  an  example  of  implied  warranty. 

34.  Is  there  any  limitation  upon  a  landlord's  right  to  transfer 
his  interest  in  a  lease? 

35.  Is  there  any  limitation  upon  a  tenant's  right  to  transfer 
his  interest  in  a  lease? 

36.  If  A,  a  landlord,  assigns  his  lease  to  C  without  notifying 
B,  the  tenant,  and  later  the  tenant  pays  A,  who  is  insolvent,  can  C 
collect  the  rent  from  Bf 

37.  Define  attornment. 


COMMERCIAL  LAW  291 

38.  If  a  tenant  assigns  his  lease  is  he  reUeved  from  his  obliga- 
tion to  pay  rent? 

39.  Define,  and  give  an  example  of  a  lease  for  years. 

40.  A  rents  B's  house  for  one  year,  agreeing  to  pay  rent  in 
monthly  installments.  Is  the  lease  one  for  years,  or  from  month  to 
month? 

4L     Is  a  lease  real  or  personal  property? 

42.  A\Tiat  is  the  practical  distinction  between  a  lease  for  years 
and  a  lease  from  month  to  month? 

43.  When,  if  at  all,  may  a  tenant  sublet? 

44.  Distinguish  assignment  and  sublease. 

45.  If  a  tenant  sublets  the  premises  is  he  relieved  of  his  obliga- 
tion to  pay  rent? 

46.  Define  and  give  an  example  of  an  estate  at  will. 

47.  Distinguish  an  estate  at  will  from  an  estate  for  years,  and 
an  estate  from  year  to  year. 

48.  If  a  tenant  for  years  is  permitted  to  hold  over  his  term 
with  consent  of  the  landlord,  in  most  jurisdictions  is  the  new  tenancy 
one  at  will,  or  one  from  year  to  year? 

49.  Define,  and  give  an  example  of  a  tenancy  at  sufferance. 

50.  Define  and  give  an  example  of  an  estate  from  year  to  year. 

51.  A  leases  a  house  for  a  month  with  the  understanding  that 
it  is  to  continue  for  similar  periods  if  agreeable  to  both  parties.  Is 
the  lease  from  year  to  year? 

52.  A  rents  B's  house  for  one  year.  At  the  expiration  of  the 
year  A  is  permitted  by  B  to  hold  over  for  a  month.  B  then  endeavors 
to  eject  A.  A  claims  he  has  a  lease  for  eleven  more  months.  Is  A 
correct  in  his  assertion? 

53."  Is  a  lease  from  year  to  yef.r  terminated  by  mere  lapse  of 
time? 

54.  Does  breach  of  a  condition  or  covenant,  in  the  absence  of 
an  express  stipulation  in  the  lease  making  it  a  forfeiture,  constitute 
a  ground  of  forfeiture? 

55.  Do  leases  for  years  require  any  notice  to  terminate? 

56.  Do  leases  from  year  to  year  require  any  notice  to  terminate  ? 

57.  In  general,  in  what  manner  must  notice  to  terminate  a  lease 
be  given? 

58.  Define  and  give  an  example  of  a  surrender. 


292  COMMERCIAL  LAW 

59.  Does  ubancloninent  of  the  premises  by  a  tenant  without 
consent  of  the  landlord,  constitute  a  surrender? 

60.  If  a  tenant  abandons  the  rented  premises,  may  the  land- 
lord relet  for  the  account  of  the  tenant? 

6L     Distinguish  breach  of  lease  from  surrender  of  lease. 

62.  If  a  landlord  commits  a  breach  of  lease  by  failing  to  repair 
according  to  agreement,  what  is  the  measure  of  the  tenant's  damages? 

63.  If  a  tenant  abandons  the  rented  premises  what  are  the  land- 
lord's remedies? 

64.  If  a  tenant  abandons  rented  premises,  may  a  landlord  per- 
mit the  premises  to  remain  vacant,  and  collect  rent  from  the  tenant 
for  the  balance  of  the  term? 

65.  If  a  tenant  abandons  a  lease  and  the  landlord  desires  to 
relet  for  the  account  of  the  tenant,  must  he  notify  the  tenant  that  he 
takes  possession,  and  relets  for  that  purpose? 

66.  How  may  a  landlord  recover  rent? 

67.  How  may  a  landlord  recover  possession  of  leased  premises 
when  the  lease  has  expired,  or  is  broken? 

TRADE  MARKS  AND  TRADE  NAMES 

1.  What  is  the  purpose  of  trade  marks? 

2.  May  anything  other  than  words,  letters,  or  figures  be  used 
as  a  trade  mark? 

3.  May  a  word  which  describes  the  article  on  which  it  is  used 
be  used  as  a  trade  mark? 

4.  May  a  name  of  an  individual  be  used  as  a  trade  mark? 

5.  May  a  name  of  a  place  or  locality  be  used  as  a  trade  mark? 

6.  If  a  person  uses  a  mark  without  any  intention  of  its  becom- 
ing a  trade  mark,  does  he  acquire  a  valid  trade  mark  therein? 

7.  A  has  acquired  a  trade  mark  on  flour;  has  he  also  acquired 
the  same  trade  mark  on  stoves  manufactured  by  him? 

8.  If  A  has  acquired  a  trade  mark  on  flour,  can  A  prevent  B 
from  using  the  same  trade  mark  on  stoves? 

9.  What  length  of  time  is  required  to  obtain  a  valid  trade 
mark? 

10.  A  used  a  trade  mark  on  flour  for  two  years,  and  ceased 
using  it  for  two  years.  In  the  meantime  B  used  the  trade  mark. 
To  whom  does  the  trade  mark  belong? 


COMMERCIAL  LAW  293 

11.  What  trade  marks,  if  any,  may  be  sold? 

12.  Define  trade  name. 

13.  WTiat  is  the  distinction  between  trade  marks  and  trade 
names? 

14.  May  a  person  acquire  a  trade  name  in  a  name  describing 
the  article  manufactured? 

15.  How  is  a  trade  name  acquired  and  how  long  must  it  be  used 
to  be  acquired? 

16.  May  a  person  acquire  a  trade  name  in  a  geographical  name? 

17.  What  is  meant  by  unfair  trade? 

18.  Is  it  unlawful  for  a  person  to  adopt  as  a  trade  name  or 
trade  mark,  a  name  or  mark  descriptive  of  the  article  manufactured, 
or  a  geographical  or  a  proper  name? 

19.  A  used  the  name  "Chicago  Varnish  Co.,"  for  ten  years,  and 
advertised  the  name  extensively,  spending  large  amounts  of  money 
in  this  connection.  B  adopts  the  name,  "Chicago  Varnish  Co.," 
and  the  public  purchases  his  product  thinking  they  are  buying  A's 
product.  Can  A  prevent  B  from  using  the  name  "Chicago  Var- 
nish Co."? 

20.  Is  everyone  entitled  to  use  his  own  name  in  the  manufac- 
ture or  sale  of  any  article  he  pleases? 

21.  WTio  may  register  trade  marks,  and  when  may  they  be 
registered? 

22.  Does  registration  of  a  mark  constitute  it  a  trade  mark? 

23.  What  is  the  advantage  of  registering  a  trade  mark? 

24.  How  may  registered  trade  marks  be  transferred? 

WILLS 

1.  Define  will. 

2.  WTien  does  a  will  take  effect? 

3.  Can  both  real  and  personal  property  be  disposed  of  by  wills? 

4.  Distinguish  the  terms  will  and  testament. 

5.  Define  and  distinguish  the  terms  testator  and  devisor. 

6.  Define  the  term  devise. 

7.  Define  the  term  bequeath. 

8.  Define  and  distinguish  the  terms  devisee  and  legatee. 

9.  What  are  the  most  common  statutory  requirements  of  a 
will? 


294  COMMERCIAL  LAW 

10.  Is  a  will  a  contract? 

11.  By  the  laws  of  what  state  is  a  will  disposing  of  real  property 
governed? 

12.  By  the  laws  of  what  state  is  a  will  disposing  of  personal 
property  governed? 

13.  May  a  will  be  in  the  form  of  a  letter  addressed  to  a  bene- 
ficiary named  in  the  will  ? 

14.  In  a  will  does  any  present  interest  in  the  property  pass  to 
the  beneficiaries  at  the  time  the  will  is  made? 

15.  When,  if  at  all,  may  a  will  be  revoked? 

16.  May  a  person  under  legal  age  make  a  will? 

17.  Can  a  married  woman  make  a  will? 

18.  WTiat  test  is  applied  in  determining  whether  a  person  is 
mentally  capable  of  making  a  will? 

19.  What  kinds  of  property  may  be  disposed  of  by  will? 

20.  Must  a  will  be  in  writing? 

21.  May  a  will  be  printed? 

22.  Define  and  describe  signing,  attesting,  and  acknowledging 
a  will. 

23.  Define  and  describe  -publication  of  a  will. 

24.  Give  an  example  of  a  contract  to  make  a  will. 

25.  May  a  contract  to  make  a  will  be  revoked  ? 

26.  Define  and  give  an  example  of  holographic  will. 

27.  What  is  the  distinguishing  feature  between  a  holographic 
will  and  an  ordinary  will? 

28.  Define  and  describe  nuncupative  wills. 

29.  May  real  property    be    disposed    of    by  a    nuncupative 
will? 

30.  WTien,  and  by  whom  must  a  nuncupative  will  be  reduced 
to  writing? 

31.  Must  a  nuncupative  will  be  attested? 

32.  WTiat  is  meant  by  revocation  of  a  will,  and  by  whom,  when, 
and  how  may  a  will  be  revoked? 

33.  Define  and  describe  alteration  of  a  will. 

34.  Define  codicil. 

35.  WTien,  and  how,  may  a  lost  will  be  proven? 

36.  Define  and  give  an  example  of  abatement 

37.  WTiat  is  meant  by  ademption  of  a  legacy? 


COIVOIERCIAL  LAW  295 

COURTS  AND  LEGAL  PROCEDURE 

1.  Define  courts. 

2.  In  general  how  may  courts  be  classified? 

3.  By  what  authority  are  Federal  Courts  established? 

4.  What  is  the  term  of  office  of  Federal  judges? 

5.  Classify  Federal  Courts. 

6.  How  many  United  States  District  Courts  are  there? 

7.  How  many  United  States  Circuit  Courts  are  there? 

8.  How  many  Circuit  Court  judges  are  there  in  each  circuit? 

9.  Do  the  Supreme  Court  judges  and  District  judges  have 
anything  to  do  with  the  Circuit  Courts?     If  so,  what? 

10.  What  is  meant  by  original  jurisdiction,  as  applied  to  a 
court? 

11.  Does  the  United  States  Circuit  Court  of  Appeals  have  any 
original  jurisdiction? 

12.  How  many  United  States  Supreme  Court  judges  are  there? 

13.  WTiat,  in  general,  is  the  jurisdiction  of  the  United  States 
Supreme  Court? 

14.  WTiere  are  admiralty  cases  tried? 

15.  What  cases  are  included  in  term  admiralty  cases? 

16.  Are  juries  used  in  the  trial  of  admiralty  cases? 

17.  By  what  authority  are  State  Courts  established? 

18.  Classify,  in  general,  State  Courts. 

19.  What  are  Courts  of  Equity,  and  over  what  classes  of  ':ases 
do  they  have  jurisdiction? 

20.  Classify  legal  actions? 

21.  Give  an  example  of  an  act  which  is  both  a  tort  and  a  crime. 

22.  Define  plaintiff  and  defendant. 

23.  Define  pleadings. 

24.  What  is  the  function  of  a  jury  in  the  trial  of  a  case? 

25.  Define  verdict,  and  distinguish  it  from  judgment? 

26.  How  are  judgments  enforced? 


INDEX 


INDEX 


Page 

Abandonment,  remedies  of  landlord  for 258 

Abatement,  definition  of 281 

Acceptance 

definition  of 5 

of  draft 121 

Acceptor 

of  negotiable  instruments 110 

rights  and  liabilities  of Ill 

Acquisition  of  personal  property 165 

Act  of  bankruptcy 25 

Act  of  God  as  affecting  carriers 211 

Ademption,  definition  of 281 

Administrative  law,  definition  of 3 

Advancement,  definition  of 281 

Adverse  interest 30 

Age,  legal 20,  fi,  10 

Agencies,  irrevocable 50 

Agency 

contracts  within  Statute  of  Frauds 31 

contracts  which  must  be  in  writing 31 

definition  of 29 

general 33 

purposes  for  which  created 32 

ratification  of 32 

special 33 

universal 33 

Agents 

apparent  authority  of 40 

how  appointed  31 

authority  of 33 

to  collect 12 

to  warrant 43 

of  corporations 95 

definition  of 29 

delegation  of  authority  by 41 

distinguished  from  master  and  servant .'■iO 

duties  of,  to  principal 3(1 

general 33 

principal  to  pay 34 

risks  assumed  by 34 

secret  instructions  of 40 


20S  INDEX 

PaRft 

Agents 

universal 33 

value  of  services 34 

who  may  be 30 

Anomalous  indorser 118 

Appeal  from  one  court  to  another 284 

Assessments 

of  corporations 92 

not  included  in  taxes 257 

Assignment 

of  contract 21 

of  insurance 153 

of  lease 255 

notice  of 260 

oral 261 

Assignability  distinguished  from  negotiability 101 

Attestation 

of  deeds 231 

of  leases 260 

of  will 277 

Attornment,  definition  of 261 

Auctioneer 45 

B 

Baggage 

what  constitutes 220 

duty  of  innkeeper  to  receive 221 

sample  cases 220 

Bailee 

definition  of 191 

liability  of 197 

lien  of 198 

right  of  possession  of 198 

right  of,  against  third  persons 198 

right  of,  to  use  property 198 

right  of,  against  bailor 198 

Bailment 

classification  of 192 

definition  of 191 

distinguished  from  sale. 168 

parties  to 191 

for  sole  benefit  of  bailee 194 

for  sole  benefit  of  bailor 193 

Bailor 

bailments  for  sole  benefit  of 193 

definition  of 191 

Banks 

checks  on 130 

of  circulation 13' 


INDEX  299 

Pape 
Banks 

classified 137 

clearing  houses 143 

definition  of 137 

of  deposit 137 

deposits  in 138 

discount 144 

of  discount 137 

exchange 144 

functions  of 138 

interest 1 4  t 

loans  of 140 

money 143 

national 137,  141 

pass  books  of 139 

powers  of 138 

private 137 

rights  of,  in  case  of  furgctl,  altered,  lost,  or  stolen  checks 140 

savings 142 

state 137 

trust  companies 142 

usury 146 

Bankruptcy 

acts  of 26 

definition  of 26 

involuntary 26 

revokes  agency 49 

voluntary 26 

Barter,  distinguished  from  sale 167 

Bearer,  negotiable  instrument  payable  to 100 

Beneficiary  of  trust 2."/2,  255 

Bequeath,  definition  of 274 

Bilateral  contract,  definition  of 9 

Bill  of  exchange,  definition  of 104 

Bill  of  lading 

definition  of 213 

negotiability  of 213 

valuation 212 

Blank  indorsement 112 

Boarding  housekeeper  not  an  innkeeper  22 1 

/Jona/uie  holder  of  negotiable  instrument .  123 
Bonds 

coupon 100 

definition  of 100 

form  of   106 

registered.  .  106 

Breach  of  contract  266 
Brokers 

defiuition  of ^5 


300  INDEX 

Pa^e 

Brokers 

insurance 45 

stock 45 

real  estate 47 

By-laws  of  corporations 91 

C 

Capital  of  national  banks 141 

Capital  stock 

of  corporations 91 

decreasing 93 

increasing 93 

Capitalization  of  corporations 91 

Carrier 

Act  of  God 211 

charges  of 216 

common 209 

defined 209 

delivery  of  goods  by 215 

delivery  of  goods  to 179 

discrimination  by 216 

of  goods 209 

implied  liability  of 210 

interstate  commerce  act 217 

liability  as  insurer 209 

lien  of 216 

limiting  liability 212 

of  mail 216 

negligence  of  shipper 211 

private 209 

public  enemy 211 

stoppage  in  transitu 215 

title  to  goods  in  possession  of 213 

Carrier  of  passengers 

baggage 220 

definition  of 218 

degree  of  care  required  of 219 

right  to  eject  passengers 219 

rights  and  liabilities  of 219 

Casualty  insurance,  definition  of 1^2 

Caveat  Emptor,  rule  of,  in  sales 174 

Certificate  of  protest 124 

Certificates  of  deposit 109 

Certificates  of  stock 89 

Certification  of  checks 106 

Cestui  que  trust 

definition  of 251 

rights  and  liabilities  of 255 

Charter  of  corporations 80 


INDEX  301 

Page 

Chattel  mortgage 204 

definition  of 204 

distinguished  from  pledge 204 

distinguished  from  sale 204 

filing  and  recording 20G 

form  of 205 

mortgagee 205 

mortgagor 205 

parties  to,  defined 204 

possession  of  propertj- 204 

redemption 207 

rights  of  mortgagee 207 

rights  of  mortgagor 20G 

as  security  for  a  debt 205 

title  in  mortgagee 204 

Chattels 

personal 164 

real 104 

Checks 

on  banks 139 

certification  of 106 

definition  of 105 

when  returned 139 

Child  may  be  agent 30 

Choses 

in  action 164,  168,  205 

in  possession 164,  1 68,  205 

Circulation,  banks  of 137 

Clearing  houses 143 

Codicil,  definition  of .  280 

Cognovit  promissory  notes 108 

Collateral  promissory  note 108 

Combination  of  capital  distinguisiied  from  trusts 251 

Commercial  law,  definition  of 4 

Compensation  of  agent 34 

Conditional  sale,  definition  of 167 

Conflict  of  laws  in  contracts 20 

Consideration 

adequate 7 

in  contracts  of  suretyshij) 159 

definition  of 7 

good 7 

illegal 8 

in  negotiable  instruments 120 

past 7 

to  trust  agreement 252 

valuable 7 

Consolidation  of  corporations 86 


302  INDEX 

Page 

Constitution 

definition  of -i 

English 3 

Constructive  trusts,  definition  of 254 

Continuing  guaranty,  definition  of 161 

Contract 

acceptance  to 5 

as  affected  by  duress 18 

as  affected  by  frauds 18 

as  affected  by  mistake 19 

agreement  in 5 

assignment  of 21 

bilateral 9 

breach  of 24 

competent  parties 6 

consideration  to 7 

by  correspondence 15 

definition  of 4 

dependent  covenants  in 24 

discharge  of 23 

of  drunkards 12 

elements  of 5 

executed 9 

executory 9 

express,  definition  of 8 

forms  of 28 

of  idiots 12 

illegal 17 

implied 8 

independeiit  covenants  in 24 

of  infants 10 

of  insane  persons 12 

of  married  women 12 

mutuality  in 9 

offer  to 5 

parties  to 6 

of  partnership 65 

remedies  for  breach  of 26 

rescission  of 24 

signing  of,  by  corporation 96 

specific  performance  of 27 

statu  quo  in , 25 

Sunday 17 

by  telegrai)h 15, 16 

trust  created  by 252 

under  seal 17 

unilateral 9 

voidable 10 


INDEX  808 

Pape 
Contract 

warranty  in 2 1 

will  not  a  contract 274 

Corporation 

act  through  agents 29 

by-laws  of 91 

calls  and  assessments  of 92 

capitalization  of 91 

certificates  of  stock  of 89 

charter  of 80,  83 

common  stock  of 93 

consolidation  of 86 

creation  of SO 

de  facto 84 

definition  of 78 

directors  of 90 

dissolution  of 99 

distinguished  from  partnership 78 

dividends  of 94 

estoppel  of :  . .  83 

foreign 98 

franchise  of 79 

kinds  of 82 

meetings  and  elections  of 87 

names  of 81 

nature  of 78 

object  of 78 

officers  and  agents  of 95 

organization  of 80 

powers  of 79 

preferred  stock  of 93 

promoters  of 84 

regulation  of 91 

reorganization  of 85 

resolution  of 91 

revocation  of  franchise  of 79 

seal  of 90 

stockholders  of 88 

ultra  vires  acts  of 97 

voting  at  meetings  of 87 

watered  stock 93 

Counterclaim  good  against  assignee 201 

Coupon  bonds 100 

Courts 

appeal  from  one  court  to  anollior 284 

classification  of 283 

definition  of 282 

reports 2 


304  INDEX 

Page 
Covenants 

in  deeds 231 

express 260 

implied 260 

of  leases 259 

Creditor  to  suretj'ship  contract 155 

Credits,  definition  of 140 

Crime,  agency  to  commit 32 

Criminal  law 3 

Cumulative  voting  at  corporate  meetings 87 

Custom  as  part  of  contract 12 

Customs  make  law 1 

D 

Damages,  definition  of 3 

Death 

of  partner 75 

revokes  agency 49 

Debts 

of  another 155 

secured  by  chattel  mortgage 205 

secured  by  mortgage 243 

transfer  of 247 

Deeds 

acknowledgment  of 232 

conclusion  of 231 

covenants  in 231 

definition  of 229 

description  of  property  in 230 

formal  parts  of 229 

habendum  clause 231 

indentures 229 

as  mortgages 242 

premises  of 230 

quit  claim 232 

redendum  clause 231 

signature  of 231 

trust  created  by 252 

warranties  in 231 

witnesses  to 231 

De  facto  corporation 84 

Defenses 120 

Del  credere  agency 46 

Delivery 

in  escrow 244 

of  goods 1 70,  215 

of  mortgages 244 

of  personal  property  sold 170 


INDEX  305 

Page 

Deposit 

indorsement  for 117 

banks  of 137 

Devise,  definition  of 274 

Devisor,  definition  of 273 

Discharge  of  contract 

by  bankruptcy 25 

by  breach 24 

by  performance 23 

by  subsequent  agreement 24 

by  tender 23 

Discount,  definition  of 144 

Dishonor,  notice  of,  in  negotiable  instruments 26 

Dissolution  of  partnership 75 

Distress,  definition  of 259 

Distribution  of  assets  of  partnership 76 

Dividends  of  corporations 94 

Divisions  of  law 2 

Domestic  exchange 144 

Dower  estates 

definition  of 226 

cannot  be  taken  away  by  will 274 

Draft 

definition  of 104 

presentment  and  acceptance  of 121 

Drawee  of  negotiable  instrument 110 

Drunkard 

contracts  of 12 

cannot  enter  into  partnership 66 

Duration  of  estates 225 

Duress 

as  affecting  wills 275 

as  defense  to  payment  of  negotiable  instrument 119 

as  defense  to  suretyship  contract 162 

definition  of • 18 

Duties 

of  agent  to  principal 36 

of  partners  to  each  other 72 

of  partners  to  third  persons 73 

of  principal  to  agent 34 

E 

Election  of  corporations 87 

Elements  of  a  contract 5 

Emblements,  definition  of 222 

Enemy,  public,  as  affecting  carrier 211 

Equity 

courts  of 27,  2S6 


306  INDEX 

Page 

Equity 

definition  of 27 

of  redemption  in  chattel  mortgages 207 

of  redemption  in  real  estate 249 

Estate,  trust 251 

Estates  in  land 225 

Estoppel 

of  corporation  from  denying  existence 83 

partnerships  by 65 

Exchange 

barter 167 

definition  of 144 

of  goods  not  a  sale 167 

Executed  contract,  definition  of 9 

Execution 

of  contracts  of  cor]:)orations 96 

definition  of 287 

of  leases 259 

of  negotiable  instruments 96 

Executory  contract,  definition  of 9 

Express  contract,  definition  of 8 

Express  trusts,  definition  of 252 

F 

F.  O.  B.,  definition  of 213 

Factors,  definition  of 44 

Federal  court 283 

Fee  simple  estates,  definition  of 225 

Females,  legal  age  of 6 

Fictitious  name  of  partnership 67 

Fidelity  insurance,  definition  of 152 

Foreclosure  of  chattel  mortgages 208 

Foreclosure  of  mortgages 250 

Foreign  corporation 98 

Foreign  exchange 144 

Forfeiture  of  leases 265 

Forgery 

of  negotiable  instruments 118 

ratification  of 33 

Forms 

of  bond 107 

of  certificates  of  deposit 110 

of  certificates  of  protest 124 

of  certificates  of  stock 89 

of  cognovit  note 109 

of  collateral  note 108 

of  contract 28 

of  judgment  note 108 


INDEX  307 

Page 

Forms 

of  partnership  agreement 77 

of  wiU 282 

Franchise  of  corporation 79 

Fraud 

defense,  of  in  suretyship 162 

definition  of 18 

effect  of,  upon  lease 263 

effect  of,  on  sale 174 

renders  contract  voidable 18 

Freehold  estates,  definition  of 226 

G 

Gambling  contracts  void 18 

Gift  of  personal  property 165 

Government  warehouses 195 

Grace,  days  of 122 

Guarantor 

contract  of 157 

notices  to 161 

Guaranty 

continuing 161 

general 161 

letter  of 161 

limited 161 

special 161 

Guests,  duty  of  innkeeper  to  receive 221 

H 

Habendum  clause  in  deed 231 

Hereditaments 222 

Highways,  how  established 224 

Holder  in  due  course  of  negotiable  instrument 123 

Holographic  wills 279 

Homestead  estates 227 

Hotelkeeper  (see  Innkeeper) 221 

I 
Idiot 

contracts  of 12 

cannot  enter  into  partnership 66 

cannot  be  a  principal 30 

relation  to  contract 7 

Illegal  acts  cannot  be  ratified 32 

Illegal  agencies  void 32 

Illegal  consideration 8 

Illegal  contracts 17 

Implied  contract,  definition  of 8 

Implied  contract  of  bailment 192 


308  INDEX 

Page 

Implied  trusts,  definition  of 253 

Implied  warranty,  definition  of 175 

Indemnity  in  suretyship 164 

Indorser 

anomalous 118 

blank 112 

for  collection 117 

contract  of,  in  suretyship 158 

for  deposit 117 

in  full , 114 

irregular 159 

liability  of 118 

without  recourse 116 

Infant 

may  be  agent 30 

contracts  of 10 

definition  of 30 

may  be  partner 66 

cannot  be  principal 30 

may  be  trustee 251 

Infringement  of  trade  mark 269 

Innkeeper 

definition  of 221 

duties  and  liabilities  of 221 

lien  of 222 

Innocent  purchaser  for  value  without  notice 123 

Insane  person  may  be  agent 30 

Insane  person  to  contract 6 

Insane  person  cannot  be  partner 66 

Insolvency  of  purchaser 179 

Insurable  interest,  definition  of 148 

Insurance 

assignment  of 153 

broker 45 

contract 146 

definition  of 146 

fidelity  and  casualty 152 

kinds  of 148 

life  policies 151 

marine  policies 151 

open  policj^ 154 

representations  in  contracts  of 150 

standard  policies 152 

suicide  clauses  in  policy  of 152 

term  policies 151 

tontine  policies 151 

underwriter's 147 

valued  policy 154 


INDEX  309 

Page 

Insurance 

warranties  in  contracts  of 159 

who  must  pay  on  leased  premises 257 

Interstate  commerce  act 217 

Involuntary  bankruptcy 25 

Irrevocable  agencies 49 

J 

Joint  liability  of  parties 22 

Judgment 

definition  of 287 

promissory  note 109 

Justice  of  peace  court,  definition  of 285 

L 

Landlord  and  tenant 

attornment 261 

definition  of 255 

implied  warranty 256 

lease 255 

notice 266 

rent 258 

taxes,  repairs,  and  insurance 257 

Law 

administrative 3 

commercial 3 

constitutional 3 

criminal 3 

definition  of 1 

division  of 2 

private 3 

public 3 

sources  of 2 

statute 2 

unwritten 2 

written 2 

Law  merchant 101 

Leases 

acknowledgment  of 259 

assignment  of 255 

covenants  of 259 

definition  of 255 

forfeiture  of 265 

form  of 269 

recording 260 

signing 260 

termination  of 265 

transfer  of 260 

witnessing 260 


310  INDEX 

Page 

Legal  tender 23,  143 

Legatee,  definition  of 274 

Lessee,  definition  of 255 

Lessor,  definition  of 255 

Liabilities 

of  agent  and  principal 36 

of  agent  to  third  person 37 

of  partners  to  each  other 72 

of  principal  to  agent 34 

of  undisclosed  principal 38 

Lien 

of  bailee 198 

of  carrier 216 

at  common  law 199 

how  enforced 199 

of  innkeeper 222 

seller's 179 

Life  estates 226 

Life  policies  of  insurance 151 

Limited  partnership 77 

Loans,  definition  of 140 

Lost  wills,  how  proven 280 

M 

Magistrate,  court  of,  definition  of 285 

Males,  legal  age  of 6 

Marine  insurance,  definition  of 151 

Married  women,  contracts  of 12 

Membership,  changes  of,  in  partnership 74 

Mercantile  agencies,  definition  of 140 

Minds,  meeting  of 6 

Mistake  of  fact 19 

Mistake  of  law 19 

Money,  definition  of 143 

Mortgagee,  definition  of 205,  242 

Mortgages 

debt  secured  by 243 

deeds  as 242 

definition  of 241 

delivery  of 244 

elements  of 244 

equity  of  redemption 249 

foreclosure  of 250 

parties  to 242 

of  personal  property 204 

recording 246 

satisfaction  of 248 

transfer  of 247 


INDEX  311 

Page 
Mortgagor 

definition  of 242 

rights  of 206 

Mutuality  in  contracts 9 

N 

National  banks 

capital  of 141 

how  created 141 

U.  S.  corporation 80 

Necessaries,  definition  of 10 

Negligence 

gross 197 

liability  of  agent  for 36 

ordinary 197 

of  shipper 211 

slight 197 

Negotiable  instruments 

bona  fide  holder  of 123 

definition  of 100 

forgery  of 118 

origin  of 100 

parties  to 110 

presentment  and  acceptance 121 

presentment  for  payment  of 123 

Negotiable  instruments 

promissory  notes 102 

purpose  of 100 

requisites  of 110 

signing,  by  corporations 96 

Negotiability 

of  bill  of  lading 213 

definition  of 100 

distinguished  from  assignability 101 

Note 

cognovit 109 

collateral 108 

judgment 108 

promissory 102 

Nuncupative  wills 279 

O 

Open  insurance 1 54 

Oral  assignment  of  leases 260 

Oral  contract 31 

Organization  of  corporation 80 

Ostensible  partner,  definition  of 67 


312  INDEX 

Page 
P 

Partners 

agreement  of 69 

definition  of 65 

distribution  of  assets  of 76 

duties  of,  to  each  other 72 

kinds  of 67 

powers  of 70 

property  of 70 

survivorship  of 75 

withdrawal  of 74 

Partnership 65-78 

Pass  book  of  banks 139 

Pawnbrokers 45 

Payee  of  negotiable  instrument 1 10 

Partial  assignments 260 

Perpetual  succession  of  corporation 79 

Perpetuities,  rule  against 225 

Personal  property 

definition  of 164 

mortgages  of 204 

possession  of 165 

Bale  of 165 

title  to 165 

transfer  of 165 

Pledgee,  definition  of 200 

Pledges,  definition  of 199 

Pledgor,  definition  of 200 

Preferred  stock 93 

Principal,  definition  of 30 

Q 

Quit  claim  deed,  definition  of 232 

Quorum  at  corporate  meetings 87 

R 

Real  property,  definition  of 222 

Redemption 

equity  of,  in  real  estate  mortgage 249 

mortgagor's  right  of,  in  chattel  mortgage 207 

of  pledged  property 203 

Redendum  clause  in  deed 231 

Registration  of  corporation 91 

Registration  of  trade  marks 272 

Reinsurance,  definition  of 153 

Remainder,  estates  in 228 

Rent 

action  by  landlord  to  recover 267 


INDEX  313 

Page 
Rent 

definition  of 258 

when  payable 258 

Reorganization  of  corporation 85 

Rescission 

of  contract,  definition  of 24 

of  sale  by  reason  of  fraud 174 

Revocation  of  agency 48 

Revocation  of  offer 15 

Revocation  of  wills 280 

Rights,  definition  of 1 

S 

Sale 

caveat  emptor 174 

definition  of 165 

distinguished  from  bailment 168 

implied  warranty 176 

of  pledged  property 200 

of  trade  mark 269 

Savings  banks 

definition  of 142 

deposits  in 138 

pass  books  of 139 

Seal 

contract  under 7 

definition  of 7 

private '. 7 

use  of,  by  corporation 96 

Signature 

of  agent  to  written  instruments 43 

to  deeds 231 

to  a  will 277 

Silent  partner,  definition  of 67 

Spoliated  wills,  how  proven 280 

Statu  quo,  definition  of 25 

Statute  of  Frauds 

as  affecting  contracts 13 

agency  contracts  within 31 

as  applied  to  leases 259 

contracts  of  suretyship  within. 160 

partnership  contracts  within 66 

in  sales 169 

Statutes,  definition  of 2 

Stock 

common 93 

increasing  and  decreasing 93 

preferred 93 

watered 93 


314  INDEX 

Page 

Stockholders  of  a  corporation 90 

Stoppage  in  transitu 179,  215 

Storage  companies 195 

Subagents 41 

Subletting 258 

Subrogation  in  suretyship 163 

Sufferance 

estates  at. . .   228 

leases  at 263 

Sunday  contracts  illegal 17 

Surety,  contract  of 156 

Surety  companies 163 

Suretyship 155-164 

Survivorship  in  partnership 75 

T 

Taxes 257 

Tearing  wills 280 

Telegraph,  contracts  by 15 

Tenancies 

at  sufferance 263 

from  year  to  year 264 

for  years 261 

at  will 263 

Tenant,  definition  of 255 

Tender,  definition  of 23 

Tenements,  definition  of 222 

Testament,  definition  of 273 

Testator,  definition  of 273 

Third  persons 

contracts  for  benefit  of 11 

liabilities  of  agent  to 37 

property  held  for  benefits  of 251 

Title  to  negotiable  instruments 201 

Title  to 

personal  property 165 

pledged  property 201 

real  property 229 

trust  property 252 

Tontine  policies  of  insurance 151 

Torts 99 

Trade  marks 268 

Trade  name 270 

Transitu,  stoppage  in 179,  215 

Treaties,  definition  of 2 

Trust  companies,  definition  of 142 

Trustees 251 


INDEX  315 

Page 

Trusts 251 

beneficiary  of 252 

classified 251 

consideration  to 253 

how  created 252 

U 

Ultra  vires  acts  of  corporation 97 

Underwriter,  definition  of 147 

Undisclosed  principal 38 

Unfair  trade 271 

Unilateral  contract,  definition  of 9 

Universal  agents 33 

Unwritten  law 2 

Usury 146 

V 

Valued  insurance 154 

Verdict,  definition  of 286 

Voluntary  bankruptcy 26 

Voting  by  proxy 87 

W 

Wagering  contracts  void 8 

Warehouseman 195 

Warranties 

in  deeds 231 

in  insurance  contract 150 

Warranty 

in  contracts 24 

deeds 230 

express 175 

implied 176 

Watered  stock  of  corporations 93 

Wife,  dower  of 274 

Will 

ademption 281 

codicil 280 

creation  of  trusts  by 252 

definition  of 273 

duress 276 

estates  at 228 

form  of 282 

holographic 279 

leases  at 263 

nature  of 274 

nuncupative 279 

publication  of 278 

revocation  of 280 


31G  INDEX 

Page 

Will 

signature  to 277 

statutes  regulating  making  of 274 

who  may  make 275 

witnessing 277 

Witnesses 

to  deeds 231 

to  a  will 277 

Written  law 2 


